What if we told you that the opening price action for a stock, fund, or index will often establish trading sentiment for the day? This is the theory behind the opening range breakout strategy.

Sounds simple enough. It’s an intuitive concept that most of us can understand.

If you can grasp this, then you’re well on your way to understanding the opening range breakout strategy.

This strategy is one of the first day-trading techniques explained in detail for individual traders. It quickly gained popularity in the 1990s and it still used by many traders today.

Toby Crabel’s 1990 book, Day Trading With Short Term Price Patterns and Opening Range Breakout, describes very specific rules for trading several markets. The book has been out of print for years, although you may occasionally find a copy for several hundred dollars (or more) on Amazon and elsewhere. (It’s rumored that Crabel would not give permission for a second printing because he was profitably managing money with it.)

Regardless, instead of focusing on the details, we’ll focus on a general yet practical overview today.

How Traders Use Opening Range Breakout

While trading based on the opening price range of a stock may sound simple, it often works. Studies have shown that the opening price will often be near the high or low of the day, especially during periods of high volatility.

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.

For example, we can see the price action of Apple (Nasdaq: AAPL) during one day in the candlestick chart below. The chart is broken up into 15-minute intervals, and the first candlestick gives us our opening range. We look to a significant break above below for our cue. And sure enough, the price action breaks below the opening range, giving us a signal to sell (or go short)…

Similarly, the price action in Tesla (Nasdaq: TSLA) on the previous day shows a bullish signal that would have led to a nice short-term gain…

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 It Matters To Traders

The reasoning behind the opening range breakout strategy is simple. And while there are variations and additional complexity that can be added, the basics can be understood (and used) by just about anyone.

This is why it has been widely used by traders to profit from intraday moves.

Opening range is also an ideal trading system for day traders with who, for whatever reason, can not stay glued to their computer to monitor price action. In the examples shown above, you know all of the required data shortly after the market opens, 15 minutes after the open. You could theoretically calculate price targets (and stop-losses) quickly and place orders with your broker and walk away.

A word of caution, however. Like may technical strategies, you shouldn’t trade this in isolation. You should have an overall strategy in place beforehand, and it is likely best employed with other criteria.

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