We’ve discussed the opening range breakout before, or it least what it takes to make for a successful breakout trade, but we never really covered the basics. That’s because there are a million websites where you could receive this information, but I might as well add my own two cents. The opening range breakout is often misunderstood because, like many things in day trading, they appear simple on the surface but are actually fairly difficult to trade. There are a lot of factors that must be accounted for and a new trader simply does not have the experience to take these trades successfully.
I also don’t believe in automated trading, nor do I think backtesting gives realistic results. If you backtested automated range breakout entries I’m certain the results would be dismal. This is because you really can’t expect a computer program to be able to account for all the factors that go into a successful breakout trade either. Oh yeah, and then there’s all the whining about high frequency trading and the “buy the low/high programs” that are supposedly ruining breakout trading.
Opening Range Breakout – The Basics
First, what is a breakout? A breakout is a trading pattern that occurs at a previously established point of support or resistance in a stock. Essentially these lines have become the battle lines for bears and bulls and the more they attack it (more volume that is traded at or around these levels) the more the pressure builds at these prices. When the price pushes past the battle line, there is usually an explosive movement in the direction of the break that builds more and more momentum as it pushes away from the line. That is your breakout trade.
Why does this breakout happen? Because as more stock is traded at a particular level, it means there are more and more people betting on that level. When the price pushes past that level, all bets are off. Say the price shoots up through resistance. It means people holding shorts were wrong, and they begin buying their stock back. Buyers see that they were right, and they begin accumulating more stock on the strength. And those who were simple sellers before might get caught up in the excitement and buy the stock back. All of the sudden, everyone is on the same side of the bet so the stock market has to move, usually very quickly, to correct the balance.
Now what is this “opening range?” The opening range is simply the price range a stock has covered during a set period of time from the stock market’s opening bell. Generally this range will set-up sometime between 10 am and noon. Breakouts don’t necessarily have to be “opening range.” There are also just range breakouts that can occur later in the day on the stock market, or any time of day as is the case for futures and forex trading. In any case, the basic scenario for all types of range breakouts is essentially the same.
What about High Frequency Trading?
Yeah, what about it? High frequency trading is the latest buzzword on the stock market and it’s the subject of many conspiracy theories, sensationalistic news pieces, and the gripes of whiney day traders everywhere. Whenever you hear someone throw around terms like “Goldman Sachs runs the stock market” or “Goldman Sachs has turned on the buy the low program again,” they are referring to the high frequency trading algorithms that were central stage during the spring and summer of 2009. I don’t honestly know the intimate details on how these algorithmic trading systems operate, but I know enough that I can adjust my trading to accommodate them. It has been said that breakout trading is dead as a result of these programs, but I have found that to be absolutely untrue. It has made it a bit more difficult, perhaps, but I still tend to have around the same success rate with the opening range breakout as I had before, outside of an initial adjustment period. Adapt or perish. That is the rule of the stock market.
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