Good price action within the opening range. When looking for a potential breakout, “good price action” prior to the breakout means the stock has a well-defined consolidation pattern. This consolidation may cover the whole opening range (high to low), or if the opening range is big, then it may be in the form of a tight consolidation pattern at the top of its range. There are four reasons why tight consolidation is good for this strategy. One, it creates a clearly defined resistance level at the top of the opening range which clearly defines the breakout point. Two, tight consolidation tends to precede powerful breakouts. Three, the well-defined resistance will become well-defined support should the stock retrace back to its breakout point. And finally, tight consolidation helps in the tactics of determining a stop loss point as discussed in the “Tactics for trading the OR breakout” section that follows.

Big relative volume during the breakout. High relative volume (above average volume) during the breakout is another bullish indication that the stock will continue higher after its breakout. The relative volume during the breakout is represented by the Scan Period volume gauge. Scan results are based on a Big Volume Now scan, therefore the HotScans table is sorted by the stocks with greatest volume in the last five minutes. This strategy also displays the relative volume during the OR as a gauge so you can quickly see if the OR experienced unusual volume. A reading of relative volume greater that 300% should be considered big volume. This is a setting you may want to increase to filter out any stocks with less that 300% volume if you are focusing only on buying the breakouts as they occur.

Strong price action after the breakout. The price action immediately after the stock has taken out its opening range high is the most important and insightful trading action of this strategy. If you are looking at the 30-minute opening range (the default setting for this Strategy), the duration of this “after the breakout” period is the 15 minutes immediately after the stock breaks above its opening range.

This period is important is because it represents the stock telling you how it feels at the new high levels. Strong price action is demonstrated by a clean breakout followed by either a substantial rally or a consolidation phase above the opening range for 15 minutes after the breakout. During this period you are looking for evidence that the stock is comfortable trading above its opening range. For example, a clean break and rally followed by an orderly retracement to the breakout level is very bullish price action. A 15-minute consolidation period above the opening range is healthy action which if followed by another move higher is very bullish.

Don’t fall in love with a stock because it broke out of the OR with good volume. Watch out for signs of trouble such as bearish price action. If the stock rejects the new high quickly (within minutes) and violently by selling off back into the opening range then the breakout is likely to fail. Another bearish pattern is a consolidation above the opening range followed by a sell off back down below the breakout point. When a stock does not demonstrate strong price action after a breakout of the OR it should be considered to have neutral bias at best. Of course if it proceeds to drop below the low of the OR it should be considered to be in a bearish condition.

High relative volume during the opening range period. High relative volume during the OR period demonstrates an unusually high level of interest in the stock. Low relative volume during the OR period should not be considered to be negative, but unusually high volume should be viewed as a significant characteristic. High relative volume provides more potential fuel for the breakout when it occurs. Be careful, high relative volume in the OR is not considered bullish until the stock breaks out to the upside. If the stock breaks down instead of up this high relative volume will act as fuel for the sell off! The default setting for this strategy is scan period relative volume greater than 0%. This strategy displays a relative volume gauge for the OR Period which makes it easy to visually filter for the highest OR relative volume stocks in the table. This is a setting you may consider increasing to 300% on days when you are finding more than enough ideas.

A bullish longer term picture. Even when day trading it is to your advantage to know whether or not the stock you are trading or considering to trade is in a bullish conditions on a daily or weekly basis. For the purposes of day trading this strategy the longer term picture should simply be considered using some basic trading common sense. Look at a daily chart and identify major areas of support and resistance. Don’t establish a long position right below major resistance. Look for situations where the stock is currently breaking or has recently cleared a major resistance level. Or, look for stocks that are bouncing off of major support levels. For more of a discussion on using support and resistance refer to the “Using Support and Resistance to Your Advantage” article in the July 2003 issue of Precision Day Trading.

Keep your losses small. As a trader you should be maniacal about keeping your losses small relative to the size of your account.

Use the market to determine a logic stop. One method of using the stock’s price action to determine your risk is to use the low of the most recent swing low or consolidation period as your “risk” point. If you use this method then you can figure out where your stop is before you enter the trade.

Use a money management stop.In addition to the stop determined by the market action, you should have a defined money management risk level. This is an absolute dollar amount that represents the maximum amount you are willing to lose on any one trade.

Identify your risk before you enter a trade. Before you enter a trade you should know the price at which you are going to exit if the stock trades against you as soon as you enter a position. The loss you would incur if you exit at your stop loss point is your “risk”. This prevents you from entering trades with a risk level that is higher than you are comfortable with, and it should help avoid second guessing yourself when it is time to take a loss.

It is best to use a combination of a money management and the stock’s price action as discussed in the previous bullets to determine your risk. This is as simple as considering both risk amounts before you enter a trade. If the stock does not have a clearly defined consolidation or a swing low that represents a risk that is less than your money management risk then you should either reduce the size of your position or look for another trading opportunity!

Good setup in the OR for an entry on the breakout. INTC demonstrated a tight, well-defined consolidation pattern right below the high of the OR providing a stop at $24.11. This consolidation resolved itself by breaking out on good volume.

Strong price action after the breakout with demonstrable support at the high of the OR. After breaking out it demonstrated strong trading action as it rallied $0.15 (almost enough to make your risk), on good volume. The orderly, lower volume retracement stopped at $24.28, one cent above the OR – right where you should expect support to be! So any bounce off this level could be traded from the long side with a stop either below the $24.28 swing low or below the last swing low before the breakout ($24.11).

Follow through after consolidating above the OR. After breaking out, INTC defined $24.42 as high and $24.28 as a low and consolidated in this range creating another breakout opportunity which was confirmed with a big volume move up out of the range at 2:30 PM. This is also an example of how opening range set ups often provide good candidates for late afternoon rallies.

The default settings used in the basic OR breakout strategy
The default settings defined in this basic strategy are intentionally set to capture a wide range of bullish OR patterns. The basic scan has three primary criteria:

Big volume Now The basic OR breakout scan is a Big Volume Now scan with a scan period of 5 minutes. The scan period relative volume is not filtered so there is not a minimum relative volume requirement, however it will always return the stocks with the highest relative volume in the last 5 minutes.

A 30-minute OR Period. All of the concepts discussed in this lesson can be applied to any OR time period. In fact, at Dataview we regularly use the 5-and the 20-minute OR periods in addition to the 30-minute OR.

The basic scan uses the 30-minute OR because it is the best time frame to start looking at the opening range approach to the markets. It is a good time period to start with because a half an hour is usually enough time to let the markets digest any overnight news. In addition, most major economic reports are released before or right at 10:00 AM so you should not get caught by the sudden volatility they can create. Finally, the market often reverses its initial opening direction between 9:50 AM and 10:05 AM so the 30-minute OR will help prevent getting caught by this market reversal period.

Greater than average volume during 30-minute OR period. Relative volume in the OR is set to be greater than 0. This is means that volume was greater than average, but it is not very demanding. The reason to have this filter be less demanding is that it will keep open the opportunities to catch big volume breakouts that occur in stocks with good price action but light OR volume. However, the OR relative volume gauges are in the scan results to enable a quick check of the OR volume conditions. The OR relative volume is a setting you may want to increase to 300% or greater on high volume days, or when you plenty of candidates and you need to be more selective.

All bullish bias OR patterns. This scan is NOT limited to fresh breakouts of the OR. This strategy looks for all of the “bullish” bias OR patterns. This is strategy is intended to show you the highest volume stocks in the last 5 minutes that have a bullish bias (trading above the opening range). The INTC example above demonstrated how powerful both a breakout of the OR and a second big volume move over the opening range can be.