Opening Range Fake Breakout Strategy for Stocks

Capture reversals during the biggest moves of day

Opening range fake breakout strategy
••• Thinkorswim

The first hour of the day is the most active, and it's where you can make the most money, quickly--or lose it if you don't have a plan. The Opening Range Fake Breakout for Stocks (or futures) is designed to capture a major reversal during that first hour. If on the right side of the trade the profits are big; and if wrong, the risk is small. Here's how that's accomplished.

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 sets a tone for the day--whether the day will be high volume, volatile, low volume, sedate, trending, and/or choppy.

On your 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 high/low, as that indicates a trend in that direction.

Fake Out Breakout

With the high and low from the first 30 minutes marked on the chart, watch for the price to move to the high or low (from in between). Ideally, the price moves above the high or below the low, but then quickly moves back above the low or below the high. That's the fake breakout. A fake breakout isn't mandatory, but it adds a bit more confirmation to the trade.

Alternatively, the price can just approach the 30-minute low (from above) or high (from below) and stay in the vicinity of the high/low for several minutes, but not break through it.

Trading the Reversal

With the 30-minute high and low marked, wait for the price to move above the high or below low, but only briefly. The price shouldn't move aggressively beyond the high or low.

Once that occurs, look for an opportunity to enter a trade. If the price moves to the low of the opening range and creates a false breakout, buy when the price moves above the high of the last candle. The buy signal must occur inside the opening range. Place a stop loss just below the day low (which should be close to the opening range low). Place a profit target just below the opening range high.

If 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 just above the day high (which should be close to the opening range high). Place a profit target just above the opening range low.

The chart above shows a trade example.

Since each stock has a different price and volatility, define exactly how far your stop loss will be above the day high or below the low, and how far your target will be below the opening range high or above the low. Trading the same stocks or ETFs all the time, or even for several days in a row, will help in this regard..

Odds Enhancers

This is not a strategy you implement every day. The odds enhancers help you determine which days to use this strategy.

Use this strategy on stock with lots of activity and volume. If there is low volume (relative to average) you're unlikely to get the price snapping back to the other side of the opening range, which produces the profit.

Implement a trailing stop loss, or some other profit taking measure, to extract profit if the price reverses before reaching the profit target.

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.

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 ideally present a $500 profit if reached.

Consider taking most of your profit at the profit target discussed above. If short, hold onto a portion of the position and exit it just below the opening range low. If long, hold onto a portion of the position and exit just above the opening range high. This allows for a bit more profit to be extracted from the trade, as the price doesn't usually stay within the opening range all day.

Final Word

Customize this basic strategy to make it your own. Create guidelines for exactly how you will enter trades and where you will set stop loss orders and profit targets. While basic guidelines are provided above, since each stock is a bit different come up with guidelines that work for the specific stocks you trade. This method can also be applied to other markets, such as futures or ETFs. Attain and maintain consistent profit in a demo account before utilizing this strategy will real capital.