In this article, I am going to discuss the Opening Range Breakout in detail. Please read our previous article, in which we discussed the Opening Range Trading Strategy. At the end of this article, you will understand the following pointersin detail.
What is the opening range?
What is the opening range breakout?
Opening range breakout types
Breakout entry for volume and price action
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, breakouts should be traded at the proper time. Here are two approaches to trading the breakout designed to minimize risk:
Buy the initial breakout when the conditions are right
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: From now on, we will discuss only bullish breakouts. The exact opposite for a bear breakout
Opening Range Breakout players
professional
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
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.
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
Opening range breakout
Opening range Accumulation breakout
Opening range Absorption breakout
What is the 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
Strong initial move (1 or more than one candle)
Price consolidate at opening range high(Flat pullback)
An unusual volume in the opening range
Strong initial move
These are the directional moves with smart money participation and conviction. If it is 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, stocks move in a 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, and 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. The 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)
The price should above Vwap
Price should not break the opening range high
Price consolidates within a tight trading range
Volume
Initial move volume should be clearly expand the previous day’s volume
Why high volume on the initial move of the day?
We are trying to identify the SM sentiment for the day. If Smart Money wants to buy stock, we would see that on the open with high volume and strong directional moves.
Rules for an opening range breakout
Wait for the first initial move to complete. should be a strong candle
Volume should be clearly expanded than the previous day
Price consolidating at a high of the day(flat pullback)
High the opening range should not break
Declining or lower volume on retracement candle
The price must be above vwap
Entry above the opening range high
Stop loss below the opening range low
BELOW ARE SOME MORE EXAMPLES GIVEN ANALYSIS YOURSELF
Opening Range Accumulation Breakout Strategy
logic
The big institutions that 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 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 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, which means smart money observes 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
It should be high or above high. Why?
If you see high volume accompanying wide spreads, 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 occurs on light volume, but as the stock climbs, the volume will increase, which is also a positive sign.
BREAK OUT NEEDS FOLLOW-THROUGH
Why does breakout need 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 are 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 the 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 rises, the volume is high, and 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.
