Trading Opening Range Breakouts

By: lerhing
One of the most common and popular intraday trading concepts is the Opening Range Breakout (ORB) trade. Since its conception, ORB has evolved into a number of different varieties which are often reviewed in the Trading EveryDay Live Trading Room with entries, set ups, and stops.

Ever since the market decline of 2000-2003, the trading environment has become one of low volatility resulting in the propensity for short-term price movements to reverse. In turn, this environment has created chaos with Opening Range Breakout trading. Let’s take a look at what this means.

Say that a trader looking at the opening prices from the stock market open interprets a decline at mid-morning as an OBR. If the trader is astute and experienced, three (3) things would come to mind before taking the trade.

1. The trader should look at the entire pre-opening market as the opening range because it is an indication of how U.S. stocks have responded to pre-opening economic reports and Asia and European market developments. The only way you can tell if the new buying and selling information is impacting traders’ value assessments is if you break out of that range.
2. A true breakout move should impact all the major market averages and sectors (including, but not limited to, Dow Jones, Standard & Poor’s, Russell 2000, etc.) the same way.
3. A valid breakout should also provide us with increased participation as there are lower or higher prices. When this happens, you can be fairly certain that that the “big boys" are “playing" in the move, which allows you to follow in their footsteps.

So did the trader take the trade? Not if the downside move turns out to be a failed test of the overnight lows. The moral of the story is to do what you have to do to figure out how to separate valid ORB trades from false breakouts. That means to continue educating yourself because just as you evolve as a trader, the trading world is evolving as well.
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