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.
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.
- 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.
- 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.
- 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.
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.
- It’s the next whole number. Whole numbers are important psychological levels.
- 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.