The opening range breakout is probably the easiest day trading setup to understand. The first hour of the trading day is considered the most volatile. Bears and bulls fight each other in the stock market, trying to tell you who will be the top group throughout the day. This volatility results in a price range from which you will be able to trade. Like all breakout trade setups, it is an excellent setup as it creates a very low risk entry. If there is no follow-through on the opening range breakout, you should exit the trade immediately.
the time frame
You are looking for open range breakouts that take place between 9:50 am and 11:00 am. This gives a stock enough time to build the range while giving you enough data to determine which way it will break.
Elements for Breakout Success
You will find four elements that need to be considered in order to make the opening range breakout trade likely and financially rewarding.
1. If you play the long side, do the Dow Jones, S&P 500, and Nasdaq have strong uptrends? They must be. If you want to short a stock, the major indices should be in a strong downtrend. Don’t pee in the wind.
2. The price must show a bias to one side or the other. The uptrend signifies a powerful bullish disposition and increases the odds of a follow through when the high is broken.
3. High or low must be tested. Without this test, this level has not proven to be resistance or support, so a follow through is less likely to occur.
4.The volume has to be high. Something to keep in mind with any breakout trading play is that volume should pick up on the breakout. Transactions within the tape should increase in size and quantity as the level is broken. This ensures that the trade has the momentum to continue towards its targets without falling back into the opening range.
These four points will ensure that you receive the highest probability of a follow-through on the opening range breakout.
output method
To exit, I prefer to set a hard target of, say, 2% or more and then exit. The bulls make money, the bears make money, but the pigs are slaughtered. You don’t need to be a pig. You want to keep your profit target small and as soon as you reach it, exit.
Be careful with the price as it is close to whole numbers. Many stock traders profit at these crucial psychological levels. These types of integers are $7, $8, $9, etc.
Open Range Breakout Gap Reversal Approach
Now I would like to mention a variant of the opening range breakout. It is called the opening gap reversal. It’s really just another one of the many useful day trading setups over the internet that you can add to your toolbox.
The game
Charts will often open up. If your chart has a gap between the market open and 11:00 am, this is the way you play it.
If a gap has opened or the chart opens within the first hour of trading, many traders think that the gaps need to be filled. Whether that’s true or not, we don’t care. We simply want to make money from investors who believe that is a given. Once the graphic is opened to the top, it is possible to fade (shorten) the space until it is filled. If you want to play a little safer without shorting, you can wait until the gap is filled and then go long.
If a gap opened to the downside or perhaps the stock chart opened lower in the first hour of trading, you could fade (go long) the gap in anticipation of it being filled. An alternative way to play is to let the gap fill, and when it does, short the action.
The conventional rule of thumb for traders is that gaps are filled most of the time. I’m not sure how correct that is, but I know a lot of people think it’s true.
The concept of the opening gap reversal is the fact that many people who had anticipated closing the gap are exiting that trade. Also, some of us are there to take advantage of that, which adds to the momentum of this opening range breakout variance.
