Are you curious as to how to trade the opening range breakout? Well, you’re not alone. In fact, this popular and simple trading strategy has been around for decades, and I can see why: It’s easy to spot, easy to make a profit, and works on any time frame. The first 15-30 minutes of the trading day between 9:30-10am sets the tone for the day. Look for the high/low of the previous day and then the high/low of the first 30 minutes at open. Watch our video on how to trade opening range breakouts.
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What Is the Opening Range Breakout?
The first hour of trading once the market opens typically sees some of the biggest price movements of the day. Moreover, the first 15 to 30 trading minutes set the tone for the trading day—whether it will be trending, volatile, high/low volume, and/or choppy. On a candlestick chart, the first 30 minutes of trading with the highs and lows called the “opening range.”
What Is the Opening Range Breakout Strategy?
I am going to oversimplify things here, but it is a trade taken above or below the market’s opening range. Due to the flurry of activity in the opening range, many traders wait for breakouts of the opening range to jump in.
For those of you wondering how to define the range, it’s quite easy. First, you identify the high/low of the previous day and second, you identify the high/low of the first 30 minutes of the open.
All things considered, this is a fantastic method because it takes into account the gap in price between the two trading days. And more often than not, gaps get filled.
Therefore, knowing the gap in price is present, and the distance of the gap will help you better manage any trade you may enter.
How To Trade The Opening Range Breakout
I tried to make this quite simple. To trade the opening range breakout, take the following steps:
- Identify the high and low prices on your chart within your chosen time frame and the high/low of the previous trading day.
- Draw support and resistance lines.
- Wait for the price to move above or below this range.
- Enter your trade .
- Profit targets (PT) should be at least 2:1 reward/risk. If you are risking 25 cents, then your first PT is 50 cents from your entry price.
How To Select Your Time Frame
When selecting your time frame, there is no right or wrong answer; you need to trade what suits you. Many would agree that the most common time frames to trade the opening range breakout is the 15 and 30 minute time frames.
Furthermore, I have found the 15 minute time frame to be useful for trading equities. Trading breakouts on index futures also work well on the 15-minute chart.
If you decide to slip down to the 5 or 1 minute time frame, ensure the momentum for the day is strong. Confluence of time frames is key.
How To Calculate an Opening Range Breakout
- If you want to calculate the opening range on a stock, look at the distance of the high and the low of the closing candle from the previous day’s candle.
- Then look at the high and low of the opening day’s candle.
- If price breaks above the range, a stock will typically be bullish.
- Likewise, it if breaks down out of the opening range, it’s usually bearish.
Volatility
The first thing you need to do is determine the stock’s volatility on a daily time frame. Volatility measures the strength of price action and can quickly be assessed using the ATR indicator on your trading platform.
Periods of low volatility, defined by low values of the ATR, are followed by large price moves. However, the one thing the ATR doesn’t do is tell us which direction the breakout will occur.
So, what many traders do is add it to the closing price and buy whenever the next day’s price trades above that value.
As the ATR of a stock moves higher and higher, you see multiple wide-range candles. Alternatively, once volatility begins to fall, you see very few wide-ranging candles. As an intraday trader, you must only trade stocks in which volatility is expanding.
I must add that some traders only trade ATR breakouts. Food for thought if you’re looking for an extra tool to add to your trading toolbox.
If you want to see the ATR talked about, along with the opening range breakout, then check out our live trading room.
Daily Moving Averages
The daily moving averages are often contested areas of support and resistance. Watch for price to gravitate towards the major ones, like the 9EMA, 50SMA, 100SMA, 200SMA for example. When price is above or below, note how it responds to these moving averages. Often an opening range breakout will hit a daily moving average and drop shortly after.
Volume
Why is volume so important? Volume surges precede price surges! Stocks setting up to breakout see a dramatic increase in volume to levels way above those set in the past ten days.
Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move low volume.
Another key point to remember; when looking at a stock with a large price movement, examine the volume. See whether it tells the same story. An example would be a stock with a surge in price with a decrease in volume.
You might think it’s a great stock to buy and jump on the bandwagon. But, the price surge with decreasing volume shows a lack of interest. And this is a warning of a potential reversal on the horizon.
In fact, if you want to trade breakouts, a volume surge is mandatory to confirm that it is, in fact, a breakout. A breakout is only reliable on relatively high volume. Breakouts during low volumes might give you a false signal. Relative volume is my favorite indicator for breakout stocks.
To Be Successful Trading the Opening Range Breakout Strategy
- Have a trading plan that outlines how you will enter your trades, exits, risk, and exactly how you define ranges
- Pick your time frame and stick with it
- Trade only volatile stocks with surging volume that break the range
- An upward relative strength line signals a long entry whereas a downward relative strength line signals a short entry
