My trading strategy is based on buying breakouts, and I will happily buy them any time of day, except at the open. Breakouts at the open have a higher chance of failure for a number of reasons. At market open, trading desks are processing all the orders that people placed the night before and before they went to work. Volume may be high, but unlike at other times of day, this volume may not be representative of ongoing buying interest—more like a one-time charge. The market hasn't had a chance to get into a rhythm, so in a sense, the action at the open is out of context. One simply doesn't have any assurance whether there will be follow-on buying interest, or if instead the breakout will fail. Indeed, one strategy that traders use is to fade (meaning sell) the opening breakout, especially if it's on a gap up.
By the same token, some of the biggest winners break out at the open, don't pull back very much, and just keep going. So what to do? Given the uncertainty of buying an opening breakout, the right thing to do is to reduce risk. How much to reduce risk is an individual decision. The safest strategy is to not enter your orders until well after market open. The Real Time Trader recommends waiting until 10:15 before entering orders. You miss out on some winners, but you also avoid the gap-and-crappers.
Another strategy is to wait to see how high the stock goes, wait for a pullback, and then buy a breakout to the new high. Notice how in the screenshot the high bar in each of the charts for the first 30 minutes is the second bar formed for the day. Instead of buying at the preset breakout price, at 10:00 AM or later put a buy order above the highest price achieved in the first 30 minutes (assuming the market hasn't run away already). You end up paying a higher price, but you also reduce the chance of buying a failed breakout. Don't forget to adjust the number of shares you purchase when you do this to account for the wider margin between the entry and exit prices. Also, because a lot of demand was burned up by the initial breakout surge, consider reducing the percentage risked, to reflect the lost profit potential. A more difficult, more risky, but by the same token potentially more lucrative tactic is to buy the pullback. Wait for any gap to fill (meaning after gapping up, price goes all the way back to the prior close); better yet, wait until lunch time or later, to put in an order to buy. Make sure you reduce your risk, preferably by 50%, if you pursue this tactic. There's no guarantee price won't keep falling down to the sell-stop after you buy; there's also no guarantee that price will even pull back at all after the initial gap up.
Let's take a look at what happened to my 4 tickers today. LO broke out and after 10 minutes immediately rotted. EGO and TGC gapped up and then began a gradual descent. The only winner so far is CELL, which broke out and was able to sustain its price level. One lesson to take away is that if you're going to take on the risk of buying the opening breakout, try to limit yourself to breakouts that don't form gaps at the open, as TGC and EGO did. A gap is a space between the prior day's close and the current day's open. Gaps have a higher likelihood of being faded, resulting in the "gap-and-crap." Another risk reduction method is to limit yourself to a fixed number of charts. For example, buy at most 1 or 2 tickers in the first 15-45 minutes of trading, and for each of these consider reducing the number of shares purchased. As Brian Shannon of Alpha Trends is fond of saying, risk management is job #1.
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