Transcription
The opening range breakout is one of the oldest setups in trading. It's a very simple concept. Mark the high and low of the first 30 minute candle or the high and low between 9:30 and 10:00 and then wait for a breakout either above the high or below the low and that's it.
Thousands upon thousands of traders use that every single day and most of them sadly lose money with it. Not because the setup doesn't work. It's been around and was really popularized again in the 80s. They're losing because they're making the same few mistakes, three mistakes mostly, and they don't even know it.
So, after 35 plus years trading the open, I've seen every version of this setup, the ones that work, the ones that blow up accounts, and the one difference that separates them. So today I'm going to tell you exactly where opening range breakout traders or OB traders go wrong where they get lost in the tall grass and the specific fix for each mistake. Because the setup itself is sound the execution is where often times it breaks the actual entry itself.
So mistake number one entering on the break. This is the most common OB mistake and it's the one that costs traders the most money. Price breaks above the opening range high and they get long immediately full-size, confident, waiting for the big money and then price reverses and sucks back down into the range within moments. Stops get triggered, losses get taken and then oh it was a false breakout. It was the alos, it was the market makers, it was the news, right? And they move on without really understanding what just happened. What happened to their money? What happened to that trade?
So, here's what happened. The open is the most manipulated period of the day. Let's talk about what the open is. Often times, and back in the late '80s when I was doing a lot of this trading, people called it the clearing range. The opening range and the clearing range are the same things. Clearing is synonymous with orders getting filled. So, the bell rings and institutions are busy filling orders. They're clearing out the orders. And while that's happening, between 9:30 a.m. and 10:00, a range or the clearing range is established.
By the way, institutions know exactly where retail orders are sitting. It's become really predictable over the last nearly 40 years. And that predictability is really the liquidity grab. So, in this case, that would be right above the opening range high or the high that was created between 9:30 and 10:00 a.m. Eastern or right below the opening range low. And usually, they're sitting there with stop orders. So, what happens? Price pushes through those levels by a little bit, just enough to trigger those entries, collect that liquidity, and then what happens? Well, there's two things. Because sometimes you'll notice opening range breakouts actually do follow through, but most of the time they reverse. They go right back into the range that they came from. That false breakout wasn't a failed signal. What it was was a liquidity sweep.
Now, before you think this is all insidious and manipulated, what's happening if a market doesn't keep going higher after a breakout? It means that there weren't more willing participants to buy at the new highs. And without new buyers pressing new highs, there's no one else to support price. So, it goes right back from where it came from. That liquidity sweep is engineered to fill institutional orders at those retail traders expense because it's a obvious level.
The fix is pretty simple, but it requires discipline. I do not enter on the break. I wait for a retest. In fact, I call it a breach. Let price breach the range and then retest. So, what is it retesting? Well, price has to break above the opening range. And in this case, let's say we're talking about the high. Then I wait. This is almost as if the market's tipping its hand and showing you that there's a probability of follow through to the upside, but not yet. So, we wait. If price can pull back to the middle of the high to low range that was established between 9:30 and 10, that's the retreat or the retracement. I will measure the 38 to 62% of the opening or clearing range. That's my zone to buy. So it breaches then it comes back to that level. And if it comes back and tests it then that's the entry. Now the level the bullishness the buying support has been confirmed. Now I'll never know and we will never know if institutions are done collecting orders right? Will never know that. But we do know that now we have a better risk-reward having bought a retracement from inside that zone and I can place my first target at the clearing range high. Now I know the move only has to retrace the step that it's already been willing to make. That's a real trade for me. Breach and retreat, not break and chase. That one change alone will transform your opening range breakout results. But be aware there will be by design fewer entries because really good trades are not coming every single morning. You may not get the retreat.
So you might say, "Okay, Rag, how would you differentiate a opening range breach or breakout that could follow through versus one that doesn't?" All right, you ready? Here are the steps. Number one, is the five-minute chart in an uptrend above the previous session close when the market breaches? There's no guarantee, but there's a higher probability there'll be some more follow-through. If that's not the case, I won't expect follow-through on the breach. If that isn't the case, I'll expect a retest or a retreat. If you want the exact pre-market checklist I use to prepare for the market every single day, it's available in the description. In fact, I'll share with you some of the indicators that I use that are available free on Trading View, and I'll give you the step-by-step that I look at each morning.
All right, the second mistake, ignoring the overall trend. So, I alluded to earlier that if there isn't an overall trend on that five-minute chart, the likelihood of the breakout following through is going to be far far lower. So, the second mistake is a lot subtler. Traders find a clear OB setup. They've looked at the high low between 9:30 and 10 on that five minute chart and there's been a breach. Market has pulled back into that 32 to 68% oops, sorry, the market has pulled back into that range of a 38 to 62% pullback. Everything looks right and then traders enter and then price starts to stall or chop sideways inside the range and then it starts to sink even lower. The setup was technically correct. Waited for the breach, waited for the retreat. But why did it fail? Because the trader never asked the one question that matters most before any intraday trade. What is the overall trend actually doing on that 5-minute chart? Because if that intraday chart is already choppy or is in a downtrend or is below the previous session close, it's going to have a very difficult time attracting buyers to let it rally again. You're fighting the bigger picture. You're fighting the flow. And you might occasionally win fighting with the trend, but you're really trading against the overall psychology of that morning. And fighting trend and fighting the probabilities is a losing game.
The fix is context always. Context first. So before you start your day trading morning, make sure we're above key levels. Here's another great key level that you can keep an eye on. Anchor a 7 a.m. Eastern volume weighted average price on your chart. Preferably price will remain above that level after 9:35. If the market's trending, fantastic. There's a higher probability of the opening range breach continuing. Or if you're waiting for the breach retreat like I do, there's a higher probability that price will stop after that retracement in the center of the range. If price is choppy, here's another thing you can do. If you want to take advantage of a move in a choppy market, it's not the entry that's going to change, it's the target. Often times traders end up with a really good entry, but they wait too long to pay themselves. And by doing that, they risk letting a winner turn into a loser. So make sure after buying the retrace, when price retests the boundaries of the clearing range, the high if you're long or the low if you're short, make sure that's your first target. And the entire time you want to keep an eye on what I call the PSC or the previous session close, which is the 4:00 PM cash close of the previous session. Above that level favors longs. Below it favors shorts. It's a great sentiment level. Above it is bullish. Below it is bearish.
Now, here's another thing that happens to a lot of traders. Are there any major hot zones, scheduled high impact economic events that are scheduled at 9:45 or 10 o'clock? Maybe there's an FOMC speaker on the calendar. Maybe there's a 10 a.m. economic release. These are things that can kill a move and create volatility. So, make sure one of the pit stops you make every morning before starting your day trading day is listing all the economic events that are going to happen between 9:30 and 10:30. Here's another layer of information you can add. If you like that anchored volume weighted average price, you can use volume candles on Trading View. Volume candles are really cool because the more volume, the wider the candle plots on the chart and the less volume, the narrower that candle will plot. You can also look at volume profile. Where is the point of control, the most number of contracts that have traded in that symbol thus far? Where is the value area high? Where is the value area low? Size does help you identify the levels the institutions have defended multiple times. So if your OB setup aligns with these levels either above these key sentiment levels or working with these high volume levels, you're not fighting institutions. There will be fewer major obstacles in your way and more likely institutional involvement behind the trade that you're now in. And that's how you stack probability in your favor. If you're fighting some of these key levels, you can pass on the trade. Flat is always a position or you can lower the desired account risk for that trade. So, for example, if you typically risk 3% per trade, maybe you drop it to two and a half or 2%, right? Because remember gang, the opens kind of come back every single day. If there wasn't a pitch over the plate today, there might be tomorrow. So, those are the context that I'll look at before any trade I take every single time. If this is helping you see the open differently, all these different levels that I've identified, hopefully you've written them down or you can watch the video again and jot those levels down. Subscribe to the channel. It lets me know I'm building the right content for you. Thanks a bunch.
All right, that brings us to mistake number three. The wrong range. The wrong day trading clock. This one surprises most traders when they hear it. The opening range breakout or the OB only works if you're marking the right opening range. And a lot of traders have been manipulating what has been a 30 minute opening range high low to all sorts of different zones. So here's what I mean. Some traders mark the first 5minute candle, the high and low of that. Some traders mark the first 15minute candle. Others will mark the first 30. I do not recommend the first 5minute candle nor the first 15 if you're just starting out with this process. In fact, the clearing range typically takes about 30 minutes to complete. And in the interest of thinking they're going to get a jump on price action, a lot of traders will narrow that window or make it arbitrary. Oftentimes you'll see other traders talk about the first five minute candle which can often be a very very large candle that can have a breach retreat of its own, right? And often times traders will look at a back test where everything looks brilliant and then they decide okay this is what we're going to do. But they never asked why does this time window matter, right? Why does the 30 minute work so much better than the five or the 15?
Here's the answer. The opening range matters because it captures the initial price discovery period. Right? This is where the institutions are positioning before the real directional move while they're filling those pending orders from the previous session or pre-market. Think of price discovery at poking at price and seeing where the buyers are and where the sellers are. That window is not the same on every instrument. Equity, stocks, ETFs, right? They have a defined open of 9:30 Eastern. The relevant range is the first 30 minutes. The futures markets run 23 hours a day. They're running overnight. So that relevant range can be a little different. But if you're trading the S&P, NASDAQ, Dow, Russell, I would still use that 9:30 to 10 a.m. Eastern clearing or opening range or your regular trading session open. The Forex session is very different. Are you trading the open of London? Are you trading the open of New York? Are you trading the open of Asia? Again, these are going to have their own ranges. So, if you're trading the wrong clock for your instrument, the setup has no logic in terms of participation. Who is doing the buying and the selling behind it? You're just drawing random lines and then hoping the instrument will fit that particular range. Right?
The fix has to be instrument specific. Know your market's open and close time. If it's more of a 23-hour market like futures are, know when Asia is opening, closing. Know when Europe is opening, know when the UK is opening, know when the US gets active, right around 7:00 a.m. Eastern. Right? Know which session open matters most for the symbol that you're trading. And know how long the initial range takes to form. Now, there's two ranges, all right, that you can watch. There's the opening range, but there's also something called the initial balance that will happen between 9:30 and 10:30. And a lot of traders don't know to look for that because after 10:30, the initial balance overrides the opening range. So, make sure you mark the high and low between 9:30 and 10 and also between 9:30 and 10:30. That second zone is known as institutional fair value or the initial balance. And that's what's watching the markets for almost four decades. Watching these opens, that's what you'll start to see the rhythm of again and again and again. Every morning, every market has a rhythm. Learn yours.
Here's the reality about opening range breakouts. It's not broken. It's just become predictable. And traders using it are breaking their bank. They're breaking their accounts by forgetting that they might really be a liquidity grab rather than taking advantage of a time-tested and popular approach. Entering on the break is ignoring the context, marking the wrong ranges, and not taking some of these basic levels we've talked about in this video into consideration. Three mistakes that have nothing to do with the setup itself and everything to do with understanding who what's at play, who's at play, and the execution. Fix the execution and the setup works. It worked 30 years ago very differently than it works now. The open itself hasn't changed, but the predictability around retail traders doing the same thing has given institutions a very predictable zone of liquidity. Humans tend to be very rigid in what they expect is going to happen, right? Human nature hasn't changed. We're all kind of stubborn or double mule. Twice as stubborn, half as smart. And the institutions know this and that's how they collect liquidity at the open. Learn to read it correctly and the open stops being this dangerous wild part of the trading day. It becomes interesting and oftentimes volatile, but it gets a whole lot more predictable.
Fixing your O execution is only part of the equation, though. The other part is knowing what to do when the setup doesn't appear. How to stay disciplined, how to stay patient, and not force trades on days where the open gives you seemingly nothing. That's exactly what the next video covers. Go check it out and I'll see you there.