Opening Range Breakout Trading Strategy

Opening Range Breakout Trading Strategy. The introduction and conclusion are crucial, but why? We all have an idea why, and we’ve probably all heard some phrases about the open, but do we truly understand why it’s so crucial?

In addition to setting the tone and direction for the day, the open also has statistical importance.

• The accompanying chart sums up the basic tenet of the opening range breakout strategy: the existence of an observable pattern in the moments immediately after the opening of the market. For this, Grimes collected 46,000 daily bars from various equities, futures, as well as currency exchange rates, and indicated the opening of each bar as a percentage of the daily range.
• Looking at the graph closely, you’ll see that the open is often situated toward the day’s extremes.
• When Grimes looks at specific parts of the data, the open’s propensity to cluster around daily highs and lows becomes much more apparent. This analysis was conducted on turbulent trading sessions, or “two sigma days,” in the E-mini S&P futures.

You might draw your conclusions from the data, but it does highlight that the market’s opening price is the most significant of the day. Printed works vary in their importance.

Opening Range Breakout Explained

• The opening, mainly the opening range, provides us with a wealth of opportunities to create trading strategies because of the open’s importance and the probability of non-random price movement.
• Trading inside the opening range reduces complexity by providing straightforward entry and exit points. As a result, there is no wiggle room in deciding where to stop.
• just what it sounds like a breakaway from the initial range. The starting point will be defined uniquely for each scenario based on the available time and testing. The opening range has traditionally been the first hour of trading following the opening since the method initially gained popularity in the 1990s.
• In light of the availability of quicker data feeds and the ability to operate on shorter time frames, some traders have chosen to restrict their definition of the opening range to the first half an hour, 15 minutes, or even one minute.
• A stock’s opening range may look something like this:

• stock data for Apple (AAPL) every 15 minutes on October 11, 2019. We can calculate an opening range for this period using the initial 15-minute bar’s high and low.
• If we were optimistic about Apple, we’d act on the second bar’s extended indication. The transaction’s profitability decreases with each passing bar if the stock stays inside its initial range. As a result of our bullish bias, we wouldn’t even consider taking short signals (a breakdown below the day’s low).

Opening Range Breakout Strategy

• Attempting to put your trading technique in a box is a major “leak,” to borrow a poker phrase. In other words, they will attempt to trade a well-known technique, such as the opening range breakout, without making any adjustments to account for their trading style or preferences, despite the system’s track record of success and the positive results of its backtests and data. Instead, there needs to be more awareness of market conditions, zero care for the nature of the commodity being traded, zero selection criteria, etc.
• These methods should be a springboard for further exploration. It’s evident that the market’s opening has some statistical relevance, but trading based only on that information is likely to result in subpar returns. All of us are aware that you can’t get anything for nothing. You can rarely find a winning trading method with a quick Google search, a few easy steps, and little effort.
• You may take other measures to improve your chances and avoid undesirable situations.
• Stocks available for trading
• In general, stock prices follow the market’s overall trend. So, for example, if you’re looking to trade a large technology company and prefer trading Google stock, you should know that the company generally follows the S&P 500’s performance. So essentially, all you’re doing is making daily purchases of beta.
• However, stocks with a trigger often move independently of market trends. As a result, they get a high number of trades, which attracts additional traders as momentum investors join the fray.
• Identifying equities with significant price changes and high relative volume in the morning before the market opens is an excellent approach to quickly identifying stocks with catalysts. Then, it would help if you determine what is triggering this change: profits, news, dilution, or anything else. Next, read up on the stock in the news and the company’s most recent SEC filings. If you are still determining the source of a stock’s movement, you are best off staying away from it.
• Show a preference for a particular path.
• Developing a directional bias in the equities you trade is an excellent approach to increasing your chances of success. First, find a stock with a strong catalyst, such as one that recently reported an earnings beat. According to all available evidence, the stock price should rise as a result of this.
• This suggests that you commit to trading only in the long direction. Stock price reactions to earnings are usually positive. So taking that short position would be unwise if the stock suddenly dropped in price.
• The Long-Term Trend in Prices
• The catalyst may be used to produce a bias in the desired direction. The process goes something like this:
• We see a stock making a significant move on the scanner.
• We investigate to identify the catalyst.
• We evaluate whether the catalyst is bullish or bearish.
• We form a directional bias based on our assessment.
• The next step is to examine the stock’s chart to see whether or not it’s worthwhile to trade, even considering the catalyst.

How to Trade an Opening Range Breakout (Example)

Trading inside the opening range reduces complexity by providing straightforward entry and exit points. As a result, there is no wiggle room in deciding where to stop.

This transaction is often executed in a short period of time (5 minutes, 15 minutes, or 30 minutes) and has a swift outcome.

Scalpers often work with 5-minute frames, whereas intraday swing traders prefer 15- or 30-minute frames.

• You can see the opening range between the two red dashed lines in the illustration above. If you look at the 5-minute chart for NVDA, you’ll see that the stock is a significant mover regardless of whether or not it’s in play.
• Opening above the VWAP and failing to break beyond pre-market highs before closing below the VWAP is a terrific setup for shorts. A narrow $109.41–$108.95 range was seen at the open for this stock.
• If $108.95 dropped, you might have gotten in with a stop at 109.41. It was a simple trade that might have netted over a point in gains as prices flushed through and plummeted sharply.
• It’s a high-probability position that, if successful, may provide a risk-to-reward ratio of 3 to 1 or more.

Final Thoughts

• For example, if the stock is oversold or overbought, such information might be helpful when trading breakouts from the starting range. It will offer you more assurance when trading the breakout and assist in confirming price activity.
• Stocks with a high relative volume in the 5-minute or 30-minute period are also more likely to succeed with the breakouts. You could also search for setups in which the first range bar opens higher than VWAP before settling lower.
• Following this checklist may help you successfully trade a breakout from the starting range:
• I favor length over breadth but don’t take it anyway.
• Use the daily chart’s price behavior to form your opinion. Then, follow the trend or the supply-and-demand mismatch to make a trade.
• Catalyst\sNews\sEarnings
• Criteria
• Liquidity, low float, volume, momentum