The first hour of the trading day is the most active and dynamic period. Though it is the time period where you can make most of your money quickly, you may also lose without a trading plan. The first hour is the most volatile time frame during the trading day.
Opening range breakout, is one of the important reversal and continuation chart patterns, designed to capture move or reversal during this first hour.
In this blog we will understand what is opening range and method to trade them:
The opening range is the high and low of a given period after the market opens. This period is generally the first 30 or 60 minutes of trading. It is one most important chart patterns to make money in stock market.
During this period we need to identify the high and low of the day. Also we need to identify pre-market highs and lows, as these levels act like a magnet on price action after the market opens.
The opening hour of the market is associated with big trading volumes and volatility. This time of the trading session provides many trading opportunities. In this way traders use the opening range to set the entry points and to predict and forecast the price action for the day.
Size of the Opening Range
The first thing you should do before trading is to measure the size of the opening range. When the market opens, you need to see two candles which will help you to measure the size of the range.
The last candle from yesterday’s trading session is the first candle and the second candle is the first once that is created when the market opens.
To get the range size you need to take the high or low of yesterday’s last candle and the high or low of the today’s opening candle. The difference between these two prices is the size of the opening range. Let’s see from the chart below how it measures the size of a range:
The green lines, as shown on the chart measure the size of the range. The upper line shows the opening range high and the lower horizontal line is the opening range low.
Opening Range Breakout Calculator
The most important part of the opening range trading is the breakout.
The opening range breakout determines the further price direction. When the price breaks out of the range, there is a big chance that the price action will continue in the same direction. Therefore opening range trading strategies use the range breakout as entry points on the charts.
This is opening range breakout. The size of the range is market with the green horizontal lines on the chart. The range breakout is located in the green circle and the price shoots up after the opening range breakout.
Opening Range Trade Strategy
The stock market opening bell can be approached in many ways. Let’s discuss about a day trading strategy:
Early Morning Range Breakout:
This is one of the popular opening range success formulas. The early morning range breakout focuses on the size of the gap and also on the breakthrough its high/low.
In this strategy we need to trade in the direction of the breakout when we identify the boundaries of gaps. The breakouts later in the day should be taken as caution.
One should always use a stop loss order when trading the early morning range breakout. The stop loss should be mid-point of the gap.
The picture above shows the hourly chart of ITC ltd, which exhibits an early morning range breakout.
The opening range is outlined with the two parallel lines. We enter into trade when the price breaks the upper level of early morning range. The stop loss should be located in the middle of the range.
1. In order to measure the size of the range you should take the distance between the High/low of the closing candle in the previous trading session and High/low of the opening candle in the new trading session.
2. The most important thing of the opening range trading is the breakout from the opening range.
- When the stock breaks the opening range upwards, then the price action is likely to continue in a bullish direction
- When the stock breaks the opening range downwards, then the price action is expected to continue in a bearish direction.
3. Early Morning Range Breakout
- When the price action breaks out of the opening range, enter a trade.
- Open the trade in the direction of the breakout whether uptrend or downtrend.
- Place a stop loss in the middle of the opening range.
- Stay in the trade for a minimum price move which is equal to the size of the morning gap.