The Opening Range Breakout Strategy is based on the common occurrence of a stock’s price action quickly escaping the early activity of a trading session.
A stock will often trade within a limited range at opening and then powerfully break away from that early trading range once the trading day begins in earnest.
The opening range high and opening range low act as resistance and support levels that can be the pivot points for a strong breakout.
Traders can use various trend indicators to gauge the likely length of the opening trading range, such as the Average Directional Movement Index.
Traders can then use momentum indicators to gauge the timing and strength of the resulting breakout from that range.
The Opening Range Breakout Strategy is an intraday strategy used by day traders and occasionally by swing traders.
Key Takeaways
- The Opening Range Breakout Strategy looks for the common pattern of a stock’s price powerfully escaping its original trading range at the beginning of a trading day.
- Traders can use trend indicators to analyze the opening trading range and momentum indicators to analyze the breakout.
A Breakdown of the Opening Range Breakout Strategy
The basic premise of the strategy is that a stock’s opening range is just a warm-up period for the stock’s inevitable price action that day.
Once the trading starts in earnest, the price action will form a powerful breakout from that early trading range.
Many traders will be unsure of the stock’s overall direction for the day, so the price action of testing the support level and resistance level provides substantial information about the market sentiment for that day.
By observing the price action within the opening range, it is possible to forecast the price action once trading begins in earnest.
How to Use the Opening Range Breakout Strategy
The key to the strategy is to correctly identify the opening range high and the opening range low.
These will form the support level and resistance level pivot points that the price will break out from.
- If the price gaps down on opening, then the opening range high is at the top of the gap.
- If the price gaps up on opening, then the opening range low is at the bottom of the gap.
Opening gaps are important because they represent psychological levels that traders will be acting against.
Once the opening range has been established, traders need to determine when the range will end and the breakout will begin.
They then need to determine the strength and direction of the resulting breakout.
Traders typically use a combination of trend and momentum indicators, with a particular focus on range-based trend indicators.
Opening Range
The opening range high and the opening range low are typically determined by the initial few minutes of trading, with the opening range rarely lasting past the first hour of trading.
Traders can set their time frames to any level, but most day traders typically set their time frames between 1 minute and 5 minutes.
- The support level is the opening range low, which is the lowest price in the opening range.
- The resistance level is the opening range high, which is the highest price in the opening range.
Breakout
The difficult aspect of the strategy is determining when the exact breakout candle occurs, the direction of the breakout and the strength of the breakout.
Traders use a range of technical analysis tools to aid in this process to avoid false breakouts, but there are also visual cues available on the chart.
The price action’s interaction with the support and resistance levels provides insight into the likelihood and shape of the breakout.
- If the price tests both levels often, the breakout will be strong.
- If the price does not test both levels often, the breakout will be weak.
- If the price tests the opening range low more often, the breakout will be down.
- If the price tests the opening range high more often, the breakout will be up.
The Best Tools for the Opening Range Breakout Strategy
The Opening Range Breakout Strategy is simple in concept but nuanced in execution.
Tight opening ranges occur often, so the difficult aspect is determining the direction and strength of the resulting breakout.
The only way to master these kinds of trading strategies is with extensive practice, which is why traders need a high-end market research tool to use this strategy in a test setting.
Our top recommendations for market research tools for retail traders are:
Practicing with this strategy will produce a huge amount of information that needs to be tracked.
The only way to keep this much detailed information organized is with a modern trading journal.
Our top recommendation for trading journals for retail traders is:
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