A Simple System That Offers Signals For Quick Profits
The opening range breakout strategy is one of the first day trading strategies explained in detail for individual traders.
In 1990, Toby Crabel wrote a book called Day Trading With Short Term Price Patterns and Opening Range Breakout. This book has been out of print for years. It’s rumored that Crabel would not give permission for a second printing because he was profitably managing money with the strategies. Copies are occasionally available for several hundred dollars on Amazon and elsewhere.
The book describes very specific rules for trading several markets. But we’ll focus on a general but practical overview today.
How Traders Use Opening Range Breakout
Traders using the opening range breakout strategy calculate the opening range. This is the difference between the highest price and the lowest price in the first few minutes of trading. Common time frames are the first 15 minutes or the first 30 minutes of the trading day, although longer or shorter periods can be used.
If price moves significantly above or below that range, traders expect to see follow through and will place orders to enter trades near the high and low of the opening range.
The opening range breakout strategy is best understood by a few rules in the following example:
1. Calculate the opening range. For example, if the high is $102 and the low is $98 in the first 15 minutes of the trading day, the opening range is $4.
2. Add the size of the range to the high and place a buy order at that price. In this example, add $4 to $102 and place a buy order at $106.
3. Subtract the range from the low to enter a (bearish) short trade. In this case the trader would enter an order to go short at $94, which is $4 below the low of the opening range at $98.
4. If prices fall back to the middle of the range, close the position with a loss. For the long trade entered at $106, close it with a loss at $100. For the short trade entered at $94, close it with a loss at $100.
5. Closed all trades at the end of the day.
There are many possible variants of these ideas. For example, you could change the time frame in step 1. You could also use a multiple of the range in steps 2 and 3…
For example, aggressive traders might use a multiple less than 1 (like 0.5) to generate more trades, while more conservative traders might use a larger multiple (like 2) to trade only the strongest trends. You could vary the stop-loss levels in step 4 and add profit targets as exits in step 5.
Why Opening Range Matters To Traders
The opening range breakout strategy has been widely used by traders to profit from intraday moves.
This is also an ideal trading system for day traders with full-time jobs. You know all of the required data shortly after the market opens, 15 minutes after the open in the example shown. Orders are calculated quickly and entered with a broker, allowing traders to profit from intraday trends without having to monitor the market all day.
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