There are several variations of the opening range breakout, and one of the most common is the opening gap reversal. Like any open range breakout, this online day trading pattern consists of a breakout from a range that has been set up in the first hours of trading.
There are two variations of the opening gap reversal; the first is a gap followed by a failed attempt to close the gap resulting in the reversal and breakout. The second consists of a gap, followed by a failed attempt to continue in the direction of the gap which results in the reversal and consequent breakout.
The first variation is essentially the failure of the common perception that all gaps close. Many people play opening gaps due to their volatility and added volume. It is the common belief that gaps close more often than not, though I think this claim is dubious, and I have never noticed a huge bias of closing gaps to support that claim. Though, because this is the belief, a lot of people enter trades hoping the gap closes. As the price gets deeper and deeper into the gap, more tension builds. You see, there was a reason why the stock gapped up or down, and that strength or weakness is often continued into typical trading hours despite the belief of those who think the gap should close. Sometimes this tension and strength/weakness is enough to pull the stock away from the direction of the close, back to the opening price, and this is where things really erupt. Due to the fact that so many have bet on that gap closing, if that opening price fails, a lot of stocks start exchanging hands as people realize their assumptions were incorrect. This volume will shoot the price in the direction of the gap, either in a breakout or breakdown, and you can generally expect it to move at least the height of the gap before things stabilize. The target for this one will be the equivalent of the height of the gap beyond the opening price. For example, if the gap was 1 point, and the price reverses for a breakout, you should expect the price to rise at least 1 point above the opening price.
The second variation is due to the continued strength or weakness of a stock continuing for a few moments into the trading day. Sometimes a stock pulls a reversal like this if some news comes out in the morning that causes a jump in the price, but people realize how inconsequential the news actually is during the first few moments of trading. This causes the initial run followed by the inevitable breakdown of that momentum as the price corrects itself to the previous day’s close. This is the cause of many traders jumping on the bandwagon of momentum, and then bailing when their trading idea has been proven wrong. The “proof” that their trading idea is invalid occurs as the stock crosses that day’s opening price. When they realize they were wrong, volume increases, and the breakout or breakdown is on. The momentum bandwagon will typically carry the price to the previous day’s open- this is your first target. This is the only situation where the gap closes more frequently than not, making it a great day trading pattern.