The opening range breakout is a popular and simple day trading strategy that has been around for decades. It’s easy to spot and works on any time frame. The first 15-30 minutes of the trading day, between 9:30 and 10 am, 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.
Once the market opens, the first hour of trading 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 trending, volatile, high/low volume, or choppy. On a candlestick chart, the first 30 minutes of trading with the highs and lows are called the “opening range.”
What Is the Opening Range Breakout?
I will 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, the high/low of the first 30 minutes of the open.
This strategy considers the price gap between the two trading days. And more often than not, gaps get filled.
Therefore, knowing the price gap is present and the distance of the gap will help you better manage any trade you may enter.
Opening Range Breakout Example
The TSLA opening range breakout is on a 1-minute chart. The breakout consisted of several bull flag patterns, which turned into a large rising wedge pattern. There was a large falling wedge pattern that preceded the rising wedge.
How to Trade the Opening Range Breakout
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 risk 25 cents, your first PT is 50 cents from your entry price.
$AMD had a nice opening range breakout on high volume on the 1-minute chart above. The stock continued to trend throughout the day until it ran into a daily moving average (not shown), which acted as resistance. Seeing the volume pick up at resistance with a green bullish candle is always nice to build confidence that the stock will break the ORH and trend higher.
Selecting 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 are 15 and 30-minute time frames.
Furthermore, traders have found the 15-minute time frame useful for trading equities. Trading breakouts on index futures also works well on the 15-minute chart.
If you decide to drop down to the five or 1-minute time frame, please ensure the momentum for the day is strong. The confluence of time frames is key.
How to Calculate an Opening Range Breakout
- Identify the distance between the high and the low of the closing candle from the previous day.
- Then, look at the highs and lows of the opening day’s candle.
- A stock will typically be bullish if the price breaks above the range.
- Likewise, it’s usually bearish if it breaks down out of the opening range.
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, many traders 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, you see very few wide-ranging candles once volatility begins to fall. As an intraday trader, you must only trade stocks with expanding volatility.
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.
Daily Moving Averages
The daily moving averages are often contested areas of support and resistance. Watch for prices to gravitate toward the major ones, like the 9EMA, 50SMA, 100SMA, and 200SMA. When the price is above or below, note how it responds to these moving averages. An opening range breakout will often hit a daily moving average and drop shortly after.
Volume
Why is volume so important? Volume surges precede price surges! Stocks setting up to break out see a dramatic increase in volume to levels way above those set in the past ten days.
Any price movement up or down with a relatively high volume is seen as a stronger, more relevant move than a similar move with a low volume.
Another key point to remember is examining the volume of a stock with a large price movement. 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.
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.
Final Thoughts on Opening Range Breakout
- Have a trading plan that outlines your entries and 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.
- A downward relative strength line signals a short entry.
- Cut your losses if the opening range breakout fails in the direction of your position.
Frequently Asked Questions
The opening range breakout works if price action breaks and holds resistance levels. Many times, the price will create a false breakout and then quickly fail.
A false opening range breakout happens when the price briefly breaks the highs and quickly fails. This traps the bulls from entering trades and quickly exits after the fake out.
The opening range breakout theory is that if price action breaks out after the first trading hour of the day, then it should continue bullish. If the price breaks down, then it should continue bearish. Many times, there are false breakouts and breakdowns.
Best Timeframes for an Opening Range Breakout
- Typical timeframe: 5-minute, 15-minute or 30-minute
- Scalpers: 5-minute
- Intra-day swing traders: 15-minute or 30-minute
