Opening range breakouts are one of the best setups for trading momentum stocks. I use this setup every week to get low risk, high reward plays on stocks that have huge explosive potential. Let’s do a walkthrough on how to trade opening range breakouts in momentum stocks like MOMO yesterday.
What Is an Opening Range Breakout?
Opening range breakouts are a setup you use at the market open. It is very simple: After three 5 minute candles are formed, you buy once the top of the range is broken, and put your stop loss at the bottom of the range. Sometimes it doesn’t consolidate for 3 candles before breaking the range. You can still take an entry if there are only one or two candles, but just don’t use full size, because it is not A+. The longer the period of consolidation in the range the better. You can check out the MOMO intraday chart below to see when the setup triggered.
The setup is simple enough, but the hard part is knowing what stocks to use it on. You need to align the setup with a trend on the daily chart as well. Here are the characteristics of the stocks you want to be using the opening range breakout on:
How Did We Know MOMO Would Go On A Huge Run?
If you have read our other article about the characteristics of the best momentum stocks, you will see that MOMO met all the criteria:
1. MOMO had a very low float, (Finviz saying at around 8 million shares).
2.Strong catalyst: Reported blowout Q1 earnings. Couldn’t ask for a better catalyst for getting a big move.
3.History of Making Big Moves: MOMO has a history of making huge moves intraday. You can see on its daily below how wide range some of its daily candles are when it gaps up and down:
When you see a daily chart that shows a stock with this kind of range, you know there’s a high probability of the stock making another big move when gaps up on blow out earnings.
4.Liquidity: Great liquidity. Almost 30 million shares today, and it traded 3.6 million shares on its first 5 minute candle. You can trade pretty much any size you want on this stock.
5.Clean Daily Chart: MOMO had only one major resistance level ahead. There is no resistance until around the $45 mark. It opened in the mid 42’s so it had a ton of room to run from the open, and that is exactly what it did.
6.Gapped Out of Consolidation: MOMO had a nice 2 month long period of consolidation. When a stock gaps out of a long period of consolidation below a resistance level, it will usually follow through to the upside. The longer the period of consolidation the better.
7.Strong Daily Trend: You can see on its daily chart that MOMO has been on a strong uptrend.
8.HUGE Short Interest: Finviz reported a 57% short interest on this stock. Over half of the float is short this stock. Even with a 10% margin of error in the reporting, that is still ton of shorts who are under water big time from the gap up. Queue a short squeeze.
How To Trade The Opening Range Breakout on Stocks Like MOMO
Once you see a stock with this kind of catalyst and daily chart, it should be your top watch at the open. Now the only thing you need is a setup to get an entry and manage your risk. MOMO gave us an ORB and a flag pattern to enter on, which made this stock even better:
You actually have two flags to enter on, and you could have even added on the break of high of day at $44 which completed the opening range breakout to the upside. The volume that comes in on the break of this level confirms the validity of this setup. These kind of setups are the type you should be trading larger than normal size. A+ setups do not come around every week, and when they do you have to capitalize on them.
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