Opening Range Breakout

In this article, I am going to discuss the Opening Range Breakout in detail. Please read our previous article where we discussed Opening Range Trading Strategy. At the end of this article, you will understand the following pointers in detail.

1. What is the opening range?
2. What is opening range breakout?
3. Opening range breakout types
4. Breakout entry for volume and price action
5. After entry volume and price action

What is the Opening Range (OR)?

The Opening Range is the difference between the first high and low of the day. How to find high and low? At least one candle should be completely against the initial move

 

The benefits of Opening Range Breakout Trading

There are several benefits to trading breakouts. For example…

• Momentum is with you – Trading breakouts allow you to enter your trade with momentum at your back
• Catch big trends – If you were to trade pullbacks, sometimes it may never come. But with breakouts, you never have to worry about missing another move in the markets
• It gives us defined entry and exit (stop loss) points.

Demerit Opening Range Breakout Trading

• False breakout or smart money trap
• Maximum time breakout failed

So breakout should be traded at a proper time. Here are two approaches to trading the breakout designed to minimize risk:

1. Buy the initial breakout when the conditions are right
2. Buy the retracement to the breakout when you need confirmation

Tips:- When the opening range is not clear, stay away from the opening range trading market

Opening Range Breakout

Note-Now onwards we will discuss only bullish breakout. Exact opposite for bear breakout

Opening Range Breakout players

1. professional
2. Those traders who have shorted the market will now be forced to cover their poor positions by buying as well. Short covering buy order above the opening range high
3. those traders not in the market may feel they are missing out and will be encouraged to start buying

Principle for an opening range breakout

• Identify how much a stock retraces relative to how much initial move in the opening range.
• Pay attention to the reaction and how stocks tend to act during this period
• And the volume activity during the opening range period

Based on the above three-pointers we have divided the opening range breakout into 3 types. These are

1. Opening range breakout
2. Opening range Accumulation breakout
3. Opening range Absorption breakout

What is Opening Range Breakout?

Opening Range Breakout means the price moves below well-defined support (opening range low) or above resistance (opening range high)

Logic

Opening range breakout depends on open 3 factors

1. Strong initial move (1 or more than one candle)
2. Price consolidate at opening range high(Flat pullback)
3. An unusual volume in the opening range

Strong initial move

These are the directional move with smart money participation and conviction. If at the start of a trading session. An Open-Drive is generally caused by participants who have made their market decisions before the opening bell. The market opens and moves aggressively in one direction.

Price consolidate AT opening range high

In strong trending markets, you’ll have a Flat pullback (price consolidates high of the day). Usually stock move in horizontal, low volatility trendless manner. Most of the trading is near one end of the range. A Structural Feature Sign of Strength Price holds gains after an up move “Eating through” residual supply

• OVERLAPPING BAR hugs the level. It shows his level is no longer a strong reference point, The price will move with the current pressure. If the level is strong then the price should react immediately
• retailer’s taking profit to reduce risk .market pulls back and goes sideways. Once bulls are confident that the bears will fail to reverse the trend, bulls buy again with the tighter stop loss(if find this pattern find the middle of the trend)
• Price should above vwap
• Price should not break the opening range high
• Price consolidate within a tight trading range

Volume

Initial move volume should be clearly expand than previous day’s volume

Why high volume on the initial move of the day?

We are trying to identify what the SM sentiment is for the day. If Smart Money wants to buy stock, we would see that on the open with high volume and strong directional move.

Rules for an opening range breakout

1. Wait for the first initial move to complete. should be a strong candle
2. Volume should be clearly expanded than the previous day
3. Price consolidating at a high of the day(flat pullback)
4. High the opening range should not break
5. Declining or lower volume on retracement candle
6. The price must be above vwap
7. Entry above opening range high
8. Stop loss below opening range low

 

BELOW ARE SOME MORE EXAMPLES GIVEN ANALYSIS YOURSELF

   

Opening Range Accumulation Breakout Strategy

logic

The big institutions who move and manipulate the market build up their massive trading positions in a well-defined trading range. After they fully enter their positions, then they initiate strong and aggressive buying or selling activity to move the price. They strive to move the price in the direction of their newly accumulated positions.

May be happen at the opening range high or above the opening range

Characteristics of re-accumulation

• Immediate background must have strength. Strong move
• Re accumulation, areas are generally in a well-defined range.
• Reaction volume remains low and volume increases at support
• Upthrust and spring can be appear
• Springs at lows are the best indications of ACCUMULATION.
• Failure of price to break support after basing above it
• Stronger BULL candles in the range
• Price Above vwap

 

Opening range Absorption breakout

Smart money observes supply at resistance. Means smart money observing supply coming from, long liquidation, profit-taking, and new short selling.

Characteristic of Opening range Absorption breakout

• Immediate background must have strength. Evidence of demand overcoming supply
• When viewed as a correction, absorption areas are generally shallow.. The main characteristic of BUYERS overcoming SELLERS is the repeated inability of prices to REACT away from opening range high.
• Reaction volume remains low
• rising supports and expanding volume on up‐swings
• AFTER upthrust(breakout failure), the price is unable to move down and unable to break the last swing low

 

  

After entry

breakout candle

Clean wide range candle close above the opening range high

Breakout volume

Should be high or above high. Why?

• If you see high volume accompanying wide spreads up, this shows that the smart money was prepared to absorb any selling from those locked-in traders who decided to sell In this situation, the market-makers anticipate higher prices and are bullish.
• High volume breakout should follow through

The danger signs to watch for at the breakout is the opposite price pattern. If the stock breaks out on good volume but immediately reverses and trades below the breakout point on continued big volume it means that there is too much supply at the new high price. This is a major warning sign. The big volume at the breakout will now represent significant resistance if the stock is below it. This pattern of a big-volume reversal at the top of the OR usually leads to a failed breakout and a selloff.

Average volume breakout

Often the breakout will occur on light volume but as the stock climbs the volume will increase. This is also a positive sign.

 

BREAK OUT NEEDS FOLLOW-THROUGH

Why breakout needs follow-through?

• For confirmation of the successful breakout
• Avoiding the smart money trap (stop loss hunting)

Smart money trap

Hunting the stops is a phrase that describes a situation where smart money pushes the stock to trade above (resistance) a certain price because they expect that there is a lot of resting orders to buy the stock if it trades above that particular level. The motive for doing this is that if the trader buys the stock to trigger an advance through the price then the flurry of stop orders will push the price even higher, at which point the trader would sell the stock to the stop orders being executed. If a breakout is created by a large number of stop orders being executed, the subsequent price action will usually be an immediate reversal back into the range. An immediate reversal is therefore a warning sign that the breakout is not going to be clean!

For confirmation of successful breakout

Traders like to see a confirmation after the breakout. One more bullish candle after breakout candle. A bull break followed by a bull break is a sign of follow-through and thus an indication of bullish enthusiasm, for as long as it lasts.

• If the price up to and the volume also high and also the price remains above its opening price after the early morning pullback, it is an excellent sign that the stock has further to go on the upside.