The market opens and your stocks on your watch list are moving upward, so you decide to go long and purchase shares or calls. Then are you left wondering why after twenty five minutes of the market open it stalls and stops moving up? For example, one trading day you noticed that PSX opens at $50.50, dipped slightly and made a low of $50.25 and then started aggressively moving upwards. You decided to chase the stock and bought when it was trading at $51.40. After you established your position, PSX continued to climb further to $51.65. Then around 9:55 am EST PSX stopped its upward climb and traded in the narrow range of $50.70 and $51.20 for the remainder of the day . I used to get stuck in trades like these till I came across the concept of Opening Range Breakout.
Statistics indicate that only 1/3 of stocks make their high or low of the day within the first 30-minutes of the market open. This means the remaining 2/3 of the equities make new highs or new lows after the first 30 minutes has elapsed. So if a trader buys a stock during the first 30 minutes, there is a high probability that the trade will not materially move up for the remainder of the day. Therefore if you are determined to make decent money trading stocks you need to understand and apply the invaluable concepts of Opening Range and Opening Range Breakout.
Lets first understand the concept of Opening Range Breakout. The Opening Range is defined in terms of time and price. The time element is simply the first X number of minutes in the trading day where the trader defines the time element in accordance to his/her personal trading style. Since I am swing trader, I concentrate on a 30 minutes Opening Range by progressively examining the 5 minute, 15 minutes interval and then finally make my decision on the 30 minute time frame.
To better understand the concept of Opening Range let’s consider the PSX example mentioned above. In this example PSX made a low of $50.25 and a high of $51.65. Therefore, the 30-minute Opening Range for PSX is simply defined as $50.25-$51.65. Market professionals mostly use a 30-minute Opening Range due to economic reports being released at 10 am EST. These reports affect the market sentiment from bullish to bearish or vice versa and thus stocks react positively or negatively. The other factor is also related to stocks themselves. Stocks may also have news which is driving their moves. Once the news is digested and analyzed stocks move in normal fashion.
Based on the example above, the Opening Range price range element for PSX is $50.25-$51.65 using a 30 minute timeframe. Therefore, when a stock starts moving above the opening range high it is considered as bullish, whereas if the stock is trading below the opening range low it is considered as bearish. This is the fundamental starting point for the trader to understand and trade the Opening Range. However, there is more to it than just price and time. The third variable is the volume, but before we bring volume into the picture we need to understand the concept of breakout, resistance and support.
To clearly understand Opening Range a trader needs to be intimately familiar with the breakout concepts which I have explained in my following blog post.
Understanding Resistance and Support
The high and low made during the Opening Range period can be considered as lines of resistance and support respectively; otherwise the stock would have moved higher or lower depending on the market sentiment during the first 30 minutes. To better see these resistance and support levels switch to a 5-minute time frame to illustrate the consolidation pattern at both the high and the low. This will visually reinforce the corresponding lines of support and resistance.
Now that support and resistance are clearly defined by the high and the low of the 30-minute Opening Range, then once the stock breaks above or below one of these two lines then you can take the decisive action. If you cannot clearly see either the support or the resistance of a stock, then it is prudent to move to the next stock which shows definitive areas of support and resistance.
Importance of Volume
Earlier we talked about price and time with regards to the Opening Range. In this section we will discuss about the importance of volume. As we know there are 8000 stocks listed on trading exchange. And all of these stocks are making lows and high during the first 30 minutes of trading. So how does a trader determine which few stocks to concentrate on when the market opens. The answer lies in the volume.
Those stocks which are moving with high volume at the market open are the first area of focus. On any bullish or bearish day, the number of stocks trading with high volume could reach to 500 or more. It is not possible for any human being to manually evaluate this list to identify good potential trading candidates. Therefore, it is suggested that you should concentrate on pre-selected basket of stocks which you have selected based on price, average volume and average true range.
If you trade options, then further restrictions will be used to identify option-able stocks which have good history of options, decent spread, high option volume and high open interest. Based on these criteria you may come up with a basket of 300 stocks which you can focus on during a trading day. Therefore, your Opening Range breakout strategy will be applied only to these 300 stocks.
When the market opens I filter my basket of stocks for those trading at high volume. For example, stocks which are trading upward at twice their normal volume have higher chance of continuation to upside than the stocks which are moving up only at 50 percent of its normal volume. Once I apply the volume filter, I only get handful of stocks to concentrate upon. This makes my job easier to identify one or two good candidates to trade that day. My Opening Range strategy is then applied to these stocks which are trading at high volume.
Let’s say I have basket of 300 stocks based on the criteria I have identified above. At market open, I apply the volume filter and it usually returns approximately 40 aggressively upward moving stocks on a bullish day. When I apply a 5-minute Opening Range filter to these 40 stocks, then I may find that only 15 stocks are moving beyond the high made during the first 5-minutes of market open. Therefore, I concentrate on these 15 stocks starting from the sixth minute of market open.
I scroll through these 15 stocks quickly using daily and 60-minutes charts to see bigger picture of how these 15 stocks are trading. Looking at these charts I create a short list of 8 – 10 stocks using various criteria such as crossing of 50-day or 200 day moving average from below, determine if it is oversold, or whether the stock is in continuation of previous trend or starting new trend. Most importantly, I gauge how much potential this stock has to capture some decent gains if I trade options.
In addition to the 5-minute Opening Range window I have set up a 15-minute Opening Range window. I now review the 8- 10 stocks which have been screened using the 5-minute Opening Range and longer time interval chart analysis to see which stocks show up in my 15-minute Opening Range window. This tells me that other stocks have stopped moving and are going through consolidation or pulling back.
Let’s say I now have 5 stocks on my 15-minute Opening Range window allowing me to immediately monitor their subsequent price action. At this time, I check the news on these 5 stocks, whether earnings are coming up, how is the action in option side, where is the support and resistance on the day chart, how much potential I have in this trade, which month and strike I will select for my option trade.
In addition, I may have other open positions from previous days which I need to monitor and address. So during the second 15 minutes of the trading day i.e. from 9:45 to 10:00 AM I take care of my open positions and wait for the 10:00 am news cycle. During this period I am also watching various indices and associated futures to see if these are hitting resistance or support or retrieving from the high/low of the day or the high/low made over night.
With my 5 or so candidates on my watch list I am ready to execute my trade on one of these stocks. Depending upon where the stock is trading in the landscape of day chart.
For details please read my following blog post on Life cycle of a stock.
I execute my Opening Range breakout strategy. One of my strategies is to go long as soon as the stock moves above the high of the 30-minute Opening Range and the market news which was just released at 10:00 AM EST is affecting the overall markets positively. I execute this strategy based on the remaining potential gain and an above average trading volume. Note the volume does not have to be 200 percent of the average volume to be considered a viable trade. However, I sometimes execute this strategy on my 5-minute Opening Range versus the 30-minute Opening Range when the volume is at 200 and above if the potential is huge and the stock is moving on some solid good news such as major drug approval by the FDA.
Another long strategy is using the Opening Range 30 minute resistance line ( 30- minute high) as support after the initial breakout. In this application, the stock is projected to retrace to the high, or just below the high of the 30-minute Opening Range. For example, the stock could have consolidated during the last 5 minutes of the 30-minutes opening range (during 25-minutes to 30-minutes of the trading day), and stock has just retraced to this consolidation area and started to move upward. It is at this time I would go long on the stock and the stock should not violate the low of the day. If it does, then it means something went wrong with it and sellers have taken control and it is time to cut loose.
Since this application of the 30-minute Opening Range is usually executed a little later in the trading day, it allows me to do some additional background checking on the stock. I look for things like news events, an earnings event coming up after market close, or merger or takeover news etc. that might be causing the stock to move up.
One of the reasons for retracement down towards the high of the Opening Range may not be related to the stock itself, but may be a function of the overall market pulling back. The stock may still find good support right near the high of the 30- minute Opening Range. Decisive action is taken to go long either by shares or call options as soon as the market starts moving up after bouncing off the 30-minute Opening Range high in anticipation that the stock will be buoyed by the rise in the market, just as it retraced during the market pullback.
Some stocks after breaking above the 30-minute Opening Range continue to move upward and thus do not provide the right entry opportunity to go long and take advantage of the upward move. In this case I look for the stock to pull back or consolidate after an hour or so. This consolidation point could be higher than the consolidation area of the 30-minute Opening Range. When stock finishes consolidating and it looks like starting to move up then I use this secondary entry point to go long. Once again the entry is made based on the idea that the remaining potential in the trade is enough to give me some decent profit.