Wednesday, August 20, 2014

opening range breakout, day trading strategies, day trading tips, day trading, daytrading

3 Factors For Opening Range Breakout Success

by Chart Shark

The Opening Range Breakout is one of the simplest day trading set-ups to understand.  The first hour of the trading day is the most volatile.  Bears and bulls are battling it out in the stock market, trying to show you who’s going to be the boss for the day.  This volatility creates a price-range you can trade from.  Like all breakout trading set-ups, this is a great set-up because it offers 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 opening range breakouts to occur between 9:50 am and 11:00 am.  This gives a stock enough time to develop the range while giving you enough information to determine which direction it will breakout.  The chart above is the chart for Apple (AAPL) from Friday, September 4th, 2009. In this example, the range developed between 9:30 & 9:45 and the opening range breakout occurred at 10:35.

Factors for Breakout Success

There are 3 factors that need to be considered in order for the opening range breakout trade to be probable and profitable.

  1. The price has to show a bias towards one side or the other.  You can see in the stock chart above that the price started low, made a high at 168.60, pulled back but then began trending towards the high.  The uptrend signifies a strong bias towards the high and increases the probability of a follow-through if the high is broken.
  2. The high or low needs to be tested.  In the Apple (AAPL) chart, the high was tested shortly before the breakout.  Without this test, this level hasn’t proven to be resistance or support so a follow-through is less likely to occur.
  3. Volume should be high.  Something to keep in mind with any breakout trading play is that the volume should increase on the breakout.  The trades on the tape should be increasing in size and quantity as the level is broken.  This ensures that the trade has the momentum to continue on to your targets without falling back into the opening range.

These 3 factors will ensure that you get the maximum probability of a follow-through on the Opening Range Breakout.

Exit Strategy

Apple (AAPL) 5 Minute Chart Breakout

Checking out the 5 minute chart, you can see that this would have been a successful opening range breakout trade.  To exit, I like to scale out.  It is no secret that I love whole numbers as natural support/resistance which makes them great targets.  169 is a great target to lock in some quick profit.  170 makes another great target for 2 reasons.

  1. It’s the next whole number.  Whole numbers are important psychological levels.
  2. It provided significant resistance on September 1st, just a few days before this breakout.

There it is; the opening range breakout.  If you have any questions or comments, just leave them below.

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{ 18 comments… read them below or add one }

Carl

Great article! I can’t agree more with you about Breakout Trading. I have recently started to trade this way and I am making it my main form of trading.

Reply

Chart Shark

Thanks!

Breakout trading is one of several day trading strategies I employ. One of the key things to remember is that more breakouts fail than succeed so it’s important to take into account multiple factors outside of the simple new high/low that’s involved in a breakout.

Reply

peter

As a novice trader I can’t thank you enough for the explanation that very enligtening. Million thanks.

Best regards,
Peter.

Reply

Chart Shark

Thanks for the comments, Peter.

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Magpie

Thank you!

I’ve been pottering around with trading the open recently, and I’ve been looking everywhere for some more information. Your article here has just cleared a lot of confusion for me, and it’s given me a good base to start developing what I’m doing.

Good on you.

Reply

Chart Shark

I’m glad you found the article useful, Magpie.

Good luck with your trading.

Reply

Mario

I’m glad I found your article. I was trying to read Tony Crabel’s book on Opening Range Breakouts, but found it impossible to understand.
Thank you,

Reply

Chart Shark

I haven’t read Toby Crabel’s Opening Range Breakout book, but I imagine he gets way too technical. I’m trying to break day trading down into more manageable concepts here. I’m happy I could help you understand breakouts a bit better, Mario. Thanks for the comment.

Maybe I should read his book and post a review and see if I can simplify his method…

Reply

Alessio

First of all awesome guide, as second i would love to ask if you consider as support/resistance the wig or the body of the candle itself, and also if the strategy is gonna fail which is the signal? an instant sell after the support is broken down? or just a 5 min wait till the body is completed ?
Don’t know if i have been clear, tho thanks anyway:)

Reply

Chart Shark

I consider the tip of the wick the support/resistance for these formations. And yes, just about as soon as the support or resistance breaks down, I’m out of the position. I’ll give it a few pennies wiggle room, but you should never “wait 5 minutes” for anything when day trading. That can make for some really significant losses, as the market can move very quickly away from these levels whether or not it’s in your favor; a bounce can cause just as large of a reaction as a break.

Reply

sumeet

how to select best candidates after scanning for opening range breakout ?

Reply

Chart Shark

I’m not sure what you mean by this. You have to find the stocks likely to make the breakout before the breakout occurs. The breakout is the trade. If you’re scanning for stocks after they’ve broken out, you’ve missed that particular trade, though that doesn’t mean the stock won’t give you another entry opportunity at some point.

Reply

sumeet

i use opening range scanner which find stocks trading near opening range high or low .how to select stocks which will give explosive breakout from the list of stocks i get after scanning ?

Reply

Chart Shark

Oh, all right. Well it’s impossible to know which stocks are going to have the best breakouts. You just have to narrow the choices down, and be there when it happens. If you’ve prepared for the trading day, you should already have a list of stocks that have high volume and should make predictable movements. It’s these stocks that will make the best candidates for following traditional trading patterns like the opening range breakout. I’ve written more about building a day trading watch list that you can find if you use the handy little seearch function at the upper right.

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dr prakash

thank u very much
i want to learn more about day trading
any books

Reply

benjamin bennet

Many people do not realize that this Breakout Strategy is simple yet very effective to gauge up/down trend of a particular stock. I’m a stock trader. Recently I ventured into day trading with assistance from stock brokers. After testing your simple strategy, I realize that this simple analytical format provides me a much faster database compared to my brokers. I recommend this to everyone that’s into stocks trading. Well, it does require time and experience to perfect anything in this world. As such, patience is always a virtue on this matter. Cheers!

Reply

Kam

Hi, read your article Opening Range Breakout, very simple and easy to understand explanation.
My question is in article, AAPL example, you used one minute charts and then 5 minutes chart for exit strategy. Can you please explain bit more, when you use 1min chart and when to use 5 min charts?

Appreciate your response.
Thanks,
Kam

Reply

Chart Shark

I don’t really have any set rules for this. I start the day with 1 minute charts, and “zoom out” to 5 minute charts when it feels right to do so. This can be anywhere from 10 to 11am, depending on how the market and my stocks are trading.

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