One of the best strategies for day trading stocks is the opening range breakout. This is a common method of trading among hedge funds due to its ease of implementation within a mechanical trading system. Individual day traders should also consider this concept because it helps to eliminate some of the discretionary aspect of trading, and can lead to more consistent profits.
The opening range breakout is a methodology in which the trader waits to enter a position long or short when a security breakouts out above or below its initial trading range. This trading range is typically defined as the high and low price that has occurred within the first X number of minutes in the trading session. The beauty of this type of strategy is that it can be combined with a number other filters so that the trader can improve the probability of success.
The concept of the opening range breakout has been written about many times over the years, particularly upon the advent of computerized trading. Day trading did not become popular until the 1990’s as the stock market boomed, volatility increased, and liquidity improved. Improved technology in computers helped desk traders compete with the traders based in the pits at the New York Stock Exchange, NASDAQ and the various commodity exchanges.
The idea of the opening range breakout really gained popularity after a number of articles were presented in Technical Analysis of Stocks and Commodities magazine by trader Toby Crabel. Crabel went on to significant success as a hedge fund trader, and he also wrote a book about the concept that is out of print.
There are a number of ways to approach the opening range breakout. The basic strategy will involve buying or selling a security at a point above the high of the first xx minutes of trading or below the low of the first xx minutes of trading. A stop loss might then be placed at the opposite extreme of that first xx minutes of trading. The trader then looks to hold the position for the rest of the trading day, and will then exit the position at the close of trading.
Another similar idea is that the trader will simply enter a position long or short if the security trades a certain amount above or below its opening price. This amount is typically tied to typical daily trading range that the security has traded within over the previous few days or weeks. The idea here is that if the security has traded this amount in one direction, it will likely continue in that direction for the remainder of the trading day.
The opening range breakout idea can also combine these two thoughts. In other words, the trader will enter a long position if a stock trades at a certain amount above the opening price, but may wait until thirty minutes after the opening. This may help to avoid some false breakouts that often occur in the first hour of trading, which is usually referred to as amateur hour.
These are just a few ideas involving the opening range breakout. This is a great tool for traders to employ in their day trading arsenal.