Because of the importance of the open and the possibility of non-random price movement, the open, and particularly the opening range, provides us with numerous opportunities to develop trading methods. Trading the opening range simplifies things because it provides us with clear entry and exit locations. There is no room for doubt regarding where to position your stop.
The opening range is the highest and lowest price for a specific period after the market opens. This is usually the first 30 or 60 minutes of trading. During this time, we ought to determine the day’s highs and lows. Also, we ought to identify pre-market highs and lows, as these levels operate as a magnet for price action after the market opens.
What is the Opening Range Breakout?
An opening range breakout is exactly what it sounds like: a break from the opening range. The opening range will be defined differently depending on your timeline and testing. When the method originally became popular in the 1990s, the opening range was traditionally the first hour of trading after the open. As time passed and traders had access to faster data feeds and worked on shorter time frames, some chose to limit their definition of the opening range to the first half-hour, 15 minutes, and, in some cases, one minute.
Opening Range Breakout Strategy
There are numerous approaches to the stock market opening bell. Let us look at a day trading strategy:
Early Morning Range Breakout
The early morning range breakout focuses on the size of the gap as well as the high/low of the breakout. When we determine the boundaries of gaps in this method, we ought to trade in the direction of the breakout. Breakouts later in the day should be treated with caution. When trading the early morning range breakout, you may always want to utilize a stop-loss order. The stop loss could be set at the gap’s midpoint.
Chart Pattern Gap Pullback Buy
This is another method for trading the opening range, however it is only used on bullish gaps. When we see a positive gap on the chart, the price begins to move in the opposite direction of the gap. This is referred to as a pullback. Because the gap is bullish, the pullback will be negative. The primary goal of this method is to forecast the end of the pullback. When using this method, one may have to understand when to buy the pullback. You could look for a reversal candlestick pattern to do this. After recognizing a reversal, you could wait for confirmation before entering a long trade. You could employ a stop-loss order to protect your trades while using this opening range trading method. Furthermore, the proper location of your stop could be below the opening range’s lowest point. You may hold your position for a minimum bullish move equal to the magnitude of the gap.
Gap Reversal
Another method to the opening morning range of stock is the gap reversal. When the price generates a gap, but the range is broken in the opposite way, this is referred to as a gap reversal. When the price breaks the lower level of the beginning range, there is a gap reversal if the gap is bullish. Similarly, if the gap is bearish, a gap reversal occurs when the price breaks through the higher level of the initial range. When you open your gap reversal trade, you may ensure to secure it with a stop-loss order. The stop loss could be set at the middle of the opening range. When trading the gap reversal, you could hold the trade for a price movement equal to the size of the gap.
Opening Range Breakout Pros & Cons
Pros
- Momentum is on your side – Trading breakouts enable you to initiate a trade with momentum on your side.
- Catch significant trends – If you trade pullbacks, you may never see them. However, with breakouts, you may not have to worry about missing another market move.
- It provides us with specific entrance and exit (stop loss) locations.
Cons
- Situations of false break or smart money trap.
- Cases of failure of maximum time breakout.
Conclusion
The market’s opening hours are the most important. It frequently provides signals of the trading pattern for the day. Intraday traders seek such cues to help them plan their trading approach. Opening range breakout aids in the development of a solid trading strategy by giving entry points.
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