Opening Range Fake Breakout Strategy for Stocks
Capture reversals during the biggest moves of day
The first hour of the day is the most active, and it's where you can make the most money, quickly. The Opening Range Fake Breakout trading strategy for stocks, stock futures, or exchange-traded funds (ETFs) is designed to capture a major reversal during that first hour. If you're on the right side of the trade, the profits are big; if you're wrong, the risk is small.
The Opening Range
The first hour of trading after the opening bell usually sees some of the biggest price movements of the day. The first 30 minutes of trading set a tone for the day—whether it will be high volume, volatile, low volume, sedate, trending, and/or choppy.
On a candlestick chart, mark the high and low price of the first 30 minutes of trading. This is called the "opening range." For this strategy, we want the price to hang around the 30-minute high or low or in between the 30-minute high and low. The price can't blow by the opening range's high or low, as that indicates a trend in that direction.
Watch for the price to move to the high or low from in between. If the price moves above the high or below the low but then quickly moves back below the high or above the low, you've got a fake breakout.
Trading the Reversal
Now look for an opportunity to enter a trade on the reversal. After the price moves to the low of the opening range and creates a fake breakout, buy when the price moves above the high of the previous candle. The buy signal must occur inside the opening range. Place a stop loss somewhere below the day low, which should be close to the opening range low. Place a profit target somewhere below the opening range high.
Alternatively, after the price moves to the high of the opening range and creates a false breakout, short sell when the price moves below the low of the last candle. The short signal must occur inside the opening range. Place a stop loss somewhere above the day high, which should be close to the opening range high. Place a profit target somewhere above the opening range low.
Since every stock or ETF has a different price and volatility, define exactly how far your stop loss will be below the day low or above the day high and how far your target will be below the opening range high or above the opening range low. Trading the same stocks or ETFs all the time, or for at least several days in a row, will help you in this regard.
The distance between your entry and stop loss should be a fraction of the distance between your entry and profit target. This means your risk is small but your profit potential is large. Only take a trade if the potential reward is at least three times greater than your risk; ideally, it should be five times greater. If you risk $100 on a trade—based on your entry point and stop loss—your profit target should preferably offer a $500 gain if it's reached.
This is not a strategy you implement every day. The odds enhancers help you determine on which days you would be most likely to achieve success with this strategy and so should consider using it.
The stock or stock future you're trading must be showing lots of activity on high trading volume. If there is low volume relative to the average, you're unlikely to get the price snapping back to the other side of the opening range, which produces the profit.
The opening range high and low should line up with longer-term resistance and support levels. For example, the price is likely to decline aggressively if the price has a fake breakout above the opening range as well as a fake breakout above a resistance level on the daily chart. When the latter occurs, it catches many traders off guard: They thought the price was going higher, it didn't, and now they have to sell.
Implement a trailing stop loss, or some other profit-taking measure, to extract profit if the price reverses before it reaching the profit target.
You'll want to take most of your profit at the profit target you decided on, but consider holding on to a portion of the position and exiting after the profit target has been reached. If you're short, exit the last of the position just below the opening range low. If you're long, exit the last of the position just above the opening range high. That substrategy gives you an opportunity to extract a bit more profit from the trade when the price doesn't stay within the opening range all day, which frequently happens.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.