Daytrading Tips

Opening Range Breakout
The Opening Range Breakout is one of the most important and utilized trading tools in the daytrader's arsenal. I know of a couple of successful hedge funds that trade a variation on this theme across a diversified portfolio of futures and equity markets with significant long term success. Gary Smith, noted author of "How I Trade For a Living" and what I consider to be the bible of daytrading, "Live the Dream by Profitably Day Trading Stock Index Futures" also utilized a form of the Opening Range Breakout.

The basic premise of the ORB is that when a market breaks out above or below the trading range set within a specified time period after the open of trading, the market will tend to continue in that direction for the rest of the trading day. Statistics have also shown that markets will tend to close within 10% of the day's high or low a statistically significant period of time, usually over 20%. When you combine these two ideas, you have found a trading edge. The hedge funds I noted have actually developed mechanical trading systems to take advantage of this edge.

There are a variety of forms of the ORB. The simplest idea is that the trader will buy a market if it breaks out above the high set in the first N minutes of trading, or sell if the market breaks out below the low set in the first N minutes of trading. Usually, a trader using this methodology will combine it with some sort of directional bias, such as a gap, the underlying trend, or some sort of pattern set up.

Another way to trade the ORB is to wait N minutes after the open, and if the market has traded a certain amount above or below the opening price, a trade will be entered. I have seen a variety of formulas used in this regard. One is to use a percentange of the 10 day Average True Range. For instance, when trading the S&P futures, if after 10 am the market trades at a level of 50% of the Average True Range above the opening price, the trader may enter a long position.

Still another way is to apply some sort of Pivot formula. One pivot formula applied by daytraders is: (High + Low + Close)/3. If the market trades above the pivot price for the day, a long bias is established, and vice versa if the market trades below the pivot price.

These are just a few such Opening Range Breakout strategies. If you can combine these with a proper risk management strategy, you can develop a mechanical trading system that is capable of generating consistent profits.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com