Mastering Day Trading: Opening Range Break Out Strategy

The initial hour of the trading day is pivotal, marked by heightened market activity and dynamic fluctuations. This period often witnesses significant volatility, presenting opportunities for strategic trading and Opening Range Breakouts.

To capitalize on this volatility, the Open Range Breakout with volume trading strategy proves effective, especially in the cash or future markets of stocks and commodities. Notably, this strategy boasts a favorable Risk and Reward ratio, offering the potential for substantial gains with minimal risk. Alongside the 2nd Candle Breakout Strategy, this approach introduces an additional profit-making tool to a day trader's arsenal.

Demystifying the Basics

Let's kick things off by demystifying the jargon. The Opening Range Break Out Strategy is like the DJ of the stock market – it waits for the right moment, then drops a beat. In simpler terms, it's about identifying a price range at the market open and pouncing when the stock breaks out of that range.

The opening bell rings, and stocks start doing their morning dance. The strategy involves setting boundaries based on the initial trading range. When a stock confidently pirouettes out of this range, that's your cue to join the dance – a dance of profit, Haha!

Navigating Market Volatility

Now, let's talk about navigating the stormy seas of market volatility. The market can be as moody as a cat in a room full of rocking chairs, so how do we navigate this chaos?

Firstly, embrace the unpredictability. Market volatility is the roller coaster that keeps this theme park exciting. The Opening Range Break Out Strategy thrives in such conditions, seizing opportunities when others are holding onto their hats.

Secondly, keep an eye on economic indicators and breaking news. These can be the gusts of wind that either carry your trade to new heights or blow it off course. Stay informed, stay nimble.

Here's a step-by-step guide on how to implement the Open Range Breakout strategy:

Marking the Opening Range

On a candlestick chart, identify the high and low prices during the first 5 minutes of trading – this defines the opening range. Subsequently, patiently wait for a candle that breaks out beyond either side of this range.

Taking Entry

1. Choose a 5-minute or 15-minute time frame on the chart, with the option to use either, as both prove effective.
2. Wait for a candle to close above or below the first candle with significant volume, preferably above the 20-day moving average (MA) for added confirmation. The process of configuring the moving average in the volume panel is illustrated in the image below. Please observe closely; we've chosen a period of 20, consistent with our use of a 20-day moving average. The key lies in the "Field" section, where we've designated Volume. This action will integrate a straightforward 20-day moving average into the Volume Panel.

3. When a breakout occurs, await a confirmation candle. If the breakout is confirmed upwards, initiate a buy; if downwards, opt for a sell. Trade only upon confirmation, unless you possess a high level of confidence, allowing for immediate action without confirmation. 

Observe the LICI chart in the image below. The breakout candle is characterized by significant volume, as are a few preceding candles. This heightened volume adds an extra layer of confidence to the trade.

4. Set your stop-loss just below the confirmation candle for buy-side and just above for sell-side. Alternatively, play it safe by placing the stop-loss just below the opening candle's high or low, considering the trade's nature. Always assess the Risk-Reward ratio.

Booking Profit

Personally, I prefer to secure profits based on Fibonacci levels:

1. Draw Fibonacci levels on the chart, referencing the details provided below.

Important Considerations:

1. Ensure the 5-minute range breaks with a notably bullish or bearish candle, closing above or below the range. Bullish/bearish engulfing candlestick patterns are recommended.
2. Volume plays a crucial role – check if the volume is above the 20-day moving average before executing a trade. For example, in the Cipla trade, the volume was above 1 million, providing a profitable outcome.
3. Aim to book 70% of your profit, if not 100%, at Fibonacci levels 1.618, 2.618, 3.618. Avoid trading near the 1.618 and 2.618 levels of the breakout candle.
4. Refrain from trades if the Risk-Reward ratio does not align with 1:2.

Exit and SL Modification

1. Adhere to strict stop-loss guidelines as outlined above.
2. If a candle closes within the 5-minute range with volume (20 MA), promptly close the trade.
3. If a candle closes without volume, await another candle with volume for confirmation within the range.

For further clarification, let's revisit the Cipla trade mentioned earlier and explore the Muthoot Finance trade, demonstrating successful implementation of the strategy.

The Nifty Future Trade: 

In this Nifty trade, consider entering when there's a breakdown of the Opening Range Candle, followed by a successful retest. Take note of the retest candle, backed by substantial volume and positioned above the 20-day moving average. The breakdown occurred precisely at the 100% Fibonacci level, leading to a target around the 261.8% level. This setup presents a favorable risk-reward ratio of above 1:2.

The 261.8% Fibonacci level serves as a favorable point to secure profits or unload a significant portion of your positions. Personally, I opt to book 80% of my position at this level, allowing me to ride the remaining portion through the market movement.

The Bottom Line:

This strategy allows for personalization and experimentation. Conduct thorough backtesting before implementing it in live trading, and feel free to share any successful tweaks or adaptations in the comments.

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Frequently Asked Questions (FAQs) on Opening Range Breakout Strategy:

What makes the first hour of the trading day so significant?

The initial hour is crucial due to heightened market activity and dynamic fluctuations, offering opportunities for strategic trading and Opening Range Breakouts.

Can you explain the Opening Range Break Out Strategy in simpler terms?

It's like the DJ of the stock market – it waits for the right moment, identifies a price range at market open, and pounces when a stock breaks out of that range for potential profits.

How does the strategy navigate market volatility?

Embrace unpredictability as the strategy thrives in volatile conditions. Stay informed about economic indicators and breaking news, acting like gusts of wind that can either elevate or disrupt your trade.

What's the significance of marking the opening range in candlestick charts?

The opening range, identified by high and low prices in the first 5 minutes, sets boundaries for the strategy. Wait for a breakout candle to initiate a trade.

Why choose between a 5-minute and 15-minute time frame?

Both time frames are effective. Choose based on personal preference or use 15 minutes to reduce noise in the data seen with 5 minutes.

How do you determine entry points in the strategy?

Wait for a candle to close above or below the first candle with significant volume, preferably above the 20-day moving average for confirmation.

Why is a confirmation candle important, and how do you act based on it?

A confirmation candle ensures the validity of the breakout. If confirmed upwards, initiate a buy; if downwards, opt for a sell. Trade only upon confirmation unless high confidence allows immediate action.

Can you explain the role of Fibonacci levels in booking profits?

Fibonacci levels act as profit-taking benchmarks. Draw them on the chart and consider securing 70% or 100% of profits at levels like 1.618, 2.618, 3.618.

What factors should be considered before initiating a trade?

Ensure the 5-minute range breaks with a notably bullish or bearish candle, use volume above the 20-day moving average, and maintain a Risk-Reward ratio of 1:2.

How do you handle stop-loss and exit strategies?

Set stop-loss just below the confirmation candle for buy-side and just above for sell-side. Close the trade if a candle closes within the 5-minute range with volume, and modify stop-loss based on market conditions.

Why is backtesting recommended before live trading?

Backtesting allows traders to evaluate the strategy's historical performance, ensuring it aligns with their risk tolerance and objectives before implementing it live.

Note: This article is intended for educational purposes only and should not be construed as investment advice. Prior to making any investment decisions, we strongly recommend consulting with your financial advisor.