Intraday Breakouts
Gap & Opening Range Breakout
The Opening Range Breakout is not only popular but an excellent strategy with proven results for intraday traders who especially use 5-10-15 minute charts. Combine this with a Gap opening and you only increase your probability of success.This style of trading will fit in well with you if you can
- make quick decisions with entries and exits
- extremely well disciplined with managing risk on your account.
Defining The Opening Range
The opening range is the high and low of a given period after the market opens. This period is generally the first 15 minutes of trading. Some traders to use higher time frames like 30 mins or an hour as well.
Defining Gap Up/Down
The Yes Bank chart shows price has gapped up this morning by nearly 4%, i.e the difference between the closing price yesterday and the opening price this morning.
A necessary condition is that today’s open is higher than yesterday’s high which is also satisfied.
In the case of Gap down openings, today’s open should be lower than yesterday’s low.
The Breakout
In the Yes Bank chart below, after the Gap up, the Opening Range Breakout (ORB) occurs at 11.45 AM. The stock breaks above 78.90, hits a high of 334.90 and closes at 79.6. The volume is good.
You will take this trade at the next candle open with a stop loss according to your apetite (generally people teach to place stop below the day's low but in most cases the difference between brakeout entry & day low/high is huge & can easily result in a massive loss so i won't recommend this kind of stops). I would target a profit of 1x to 1.5x of my risk. Once it crosses my 1x target, I will protect my profit with tighter stops. You could also choose to book partial profits and trail a stop for larger gains if you are trading multiple lots. I leave that judgement to you.
Important
You must keep in mind a few pointers when you take these breakout trades.
- Always take the breakout trade in the direction of the gap. If the stock has gapped up, take a long trade, when the stock breaks above the opening range.
- If the stock gaps down, take a short trade, when the stock breaks below the opening range.
- If you prefer to take a counter trend trade, you risk ending up on the wrong side during a pullback. To minimise this risk, wait for a confirmation by allowing the breakout to occur first and fail, before entering the position. We’ll discuss this in detail in a future article.
- Ensure there is sufficient volume when the breakout happens. However, extremely large volume can signal exhaustion and low volume shows disinterest, and are both not preferred.
- The earlier in the day the breakout occurs, the better. Tread with caution if breakouts occur later in the day as the volumes may be lower.
- Always use a hard stop loss order when trading this strategy.
- Avoid taking the trade, if either the gaps or the opening ranges are extremely large. This would mean you’ll be risking way more than you could possibly make on the trade. It’s just not worth it.
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