Opening Range Breakout

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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.

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1. What is the opening range?
2. What is the 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.

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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:

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: From now on, we will discuss only bullish breakouts. The exact opposite for a bear
breakout

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Opening Range Breakout players
1. professional

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 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.
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 the Opening Range Breakout?

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

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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 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.

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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

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Why high volume on the initial move of the day?

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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

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 the opening range high
8. Stop loss below the opening range low

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BELOW ARE SOME MORE EXAMPLES GIVEN ANALYSIS YOURSELF

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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

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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

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Stronger BULL candles in the range
Price Above vwap

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Opening range Absorption breakout

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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

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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.

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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.

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Please watch the following video to learn and understand the opening range breakout
concept better.

In the next article, I will discuss 3 Rules for Stock Volume Analysis in Trading. In this
article, I try to explain the Opening Range Breakout in detail. I hope you enjoy this
article. Please join my Telegram Channel, YouTube Channel, and Facebook Group to
learn more and clear your doubts.

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About the Author: Pranaya Rout

Pranaya Rout has published more than 3,000 articles in his 11-year
career. Pranaya Rout has very good experience with Microsoft
Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core,
ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing,
Microservices, Design Patterns and still learning new technologies.

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