THE OPENING RANGE BREAKOUT STRATEGY
One of the most popular and highest risk/reward day trading strategies is the opening range breakout.
How does it work?:
- We start by looking for a stock or ETF that is gapping up or down during pre-market hours. This would suggest that there's interest in the stock/ETF going higher or lower.
- You wait either 5, 15 or 30 minutes after the market opens and then buy calls or puts when a breaks its 5, 15 or 30 minute range. I personally use the 5 minute time frame. The longer time frame will provide more information about the direction a stock or ETF is likely to move. Volatility also decreases later in the session than in the first few minutes, but there is the possibility of less upside or downside potential.
- The Opening Range Breakout strategy works best with stocks that are gapping significantly and not when the market is trading sideways on inside days.
- Pay close attention to volume when a stock gets to the desired breakout level.
- Don't get into a trade, if a stock has gone into one direction for more than 5 minutes, because there is a high chance of a reversal.
- Trade the Opening Range Breakout on stocks that have high volatility and very liquid options. This helps so that you can get into and out of a trade with ease.
- Backtest charts to see if you would have made money, if you had bought the break of the 5, 15 or 30 minute range on that day.