You might be wondering why I talk so much about keeping things simple.
All the time, it’s either a simple strategy, or a simply analysis tool, or a simple laddering technique that works with any asset.
It’s simple (lol)... when trading techniques get complicated, that’s when things start to go wrong. At least that’s been my experience. Complex, heady trading is far more likely to confuse me than deliver the kind of profits I’m looking for.
And I’ll bet it’s the same for you.
In fact, that’s one reason why we recently put together a new trading service called On The Clock. By delivering specific, actionable trades to our members inboxes and and every month, On The Clock makes it easy to put together a powerful, profitable stock portfolio.
Because there’s just so much noise out there. Buy this… investing in that… find your profits here… Even for traders with years of experience, it can be a lot to sift through.
That’s why, with On The Clock you’ll only see the best, most profitable trade opportunities we’re finding in the market.
Like I said, it’s simple. And simple is good.
But, the reason I focus on simple strategies so much because so many times I see beginning traders who believe that complex strategies equate to profitable strategies and that is not the case.
In reality, the more complex the strategy, the more difficult it is to interpret, execute and manage. More often than not complex strategies do not equate with accuracy or profitability as often believed to be the case.
And that brings us to the opening range breakout method...
This simple entry strategy has been around for more than 50 years and remains one of the most popular entry strategies to this day. As a matter of fact, I know several professional traders and fund managers who use the opening range breakout as their primary entry method.
Full-on pros, who have based their careers on this “simple” strategy.
The opening range is the highest price and the lowest price traded during the first half hour of the trading day. I sometimes refer to the first half hour trading range as the opening price bracket.
This particular trading period is important because, more often than not, it sets the tone for the remainder of the trading day. Between the closing of the previous trading session and the opening of the current session several intervening events can occur.
There’s plenty that can happen in that window that has a major impact on the trading session. Government reports... stock earnings... overseas markets news and dozens of other fundamental and technical factors play a vital role in the U.S economy and more relevantly on market sentiment.
It’s all about pressure building up overnight...
Whatever the case, to trade the opening range breakout, I prefer to use a 5-minute bar chart and place a buy stop a few ticks above the highest price reached during the previous six bars and simultaneously place a sell stop a few ticks below the lowest price reached during the past 6 trading bars.
In addition, I need to make sure three additional conditions are met before I enter the market in either direction:
Condition 1: It’s Before 11am
The first condition to market entry is time. The market must hit the buy stop or sell stop within one hour of defining the high and low of the opening range bracket or one and half hour after the opening bell.
From years of observation and computer back testing several different markets, I concluded that the quicker the market breaks above or below the opening range bracket, the better the odds of the trade working out.
Most breakouts that occur later in the day do not carry sufficient momentum to sustain the volatility and direction that is worth the risk of entering the trade after the first hour and a half of the trading day.
Condition 2: There’s a Bias Toward One Side Over the Other
I like to see is continuous bias in one particular direction. It doesn’t matter which way, there just has to be a favored side.
The ideal market action prior to breaking out of the opening range occurs when the market tests either the high or the low on more than one occasion or trades close to that level repeatedly, making higher highs and higher lows in anticipation of breaking out to the upside or alternately making lower lows and lower highs for the majority of the first half hour leading to a breakdown to the downside.
What I don’t want to see is a market that keeps swinging back and forth in a choppy trading range between the high and low bracket.
Condition 3: There’s Plenty of Volume
There must be a substantial and gradual build up or increase in volume leading up to the breakout or breakdown in price outside of the opening range price bracket.
The vast majority of the time, market volume peaks during the first 15 minutes and the last 15 minutes of the trading day. As a result, the volume at the 30-minute mark typically begins to fall off substantially, making it difficult to gauge volume at the 30-minute mark accurately, even when markets are making new highs or lows.
My solution to deal with volume drying up is simple: as long as volume is dropping off gradually and is still within the range that existed during the first 15 minutes of trading, I don’t consider it a trade breaker. If however, I find that volume is barely moving compared to how it was during the first 15 minutes, I reconsider placing the order.
That’s the opening range trade. But it’s not me favorite day trading technique. Every technique in my arsenal excels at one particular type of trading. That’s why I have so many “loves,” so that I can address any asset, in any market, in any situation. Here’s what it looks like in action...