It is widely held that many stocks, especially those in the Dow, normally seem to establish their effective range for the day within the first hour of trading. But, if a market is breaking out of its first-hour range, one can assume that there is some excitement -- some additional interest -- in that market. Wouldn't it be great to have a tool that could spot these breakouts as they happen!

eSignal’s Rally Scanner has had this capability for 7 years now. Not only can it show us the breakout of the first hour’s range in a market but also a breakout of the noon high / low, as well as the last-hour high / low. This little-known tool can give you knowledge of the markets that are going on a tear that day and help you increase your profits.

Let me lay out a simple strategy you can use to your advantage.

This table is a listing of stocks that showed up in the Rally Scanner at 10:31 a.m. ET on a given day when I used the First Hour High Breakout as the condition. I took each of these markets and applied simple rules to consider if and when to enter the market.

The method of entry was simply to get in when the market had moved a small percentage above the 10:30 bar on a 5-minute chart. I assumed 100 shares bought in each market. However, as any trader will tell you, getting in is the easy part.

It has become obvious to me from talking to thousands of traders over the past 8 years, that exiting a position, profitable or not, is the most difficult part of trading. For that reason, I have also put together 3 different methods of exiting this strategy, either at a profit or a small loss.

1. Remain long in the breakout market as long as the bars on a 5-minute chart are remaining at the TOP of the Donchian Channels (DC). If you get more than two bars in a row that are not touching the top of the DC, exit the trade.
2. Remain in the trade as long as the market remains above the Parabolic Stop and Reverse (PSAR).
3. Use a 14-period Average True Range (ATR), and stay in as long as the market does not breech this price level from your entry.

For instance, if the market is entered at $50.00, and the 14-period ATR is $0.50, your stop loss is placed at $49.50. As the market begins to move in your direction, you can trail this stop by keeping the initial $0.50 as your stop or just by switching over to the PSAR to trail it. In my experiment, once I had reached $0.50 in profit, I switched over to the PSAR.

Using the ATR as a stop seems to work much better in a volatile market, such as the ones tested with this strategy. The Donchian Channels, while giving us the best chance at big gains, also seem to present too much risk.

This is usually the case in trading -- great risk can equal great reward. However, great risk can, more often than not, equal great catastrophe! The ATR provided a very safe stop in order to preserve the capital so that we can live to trade another day.

This technique allowed for the best combination of small losses with big gains. This is an important combination, especially when you add in the fact that there were two more losing trades than winners!

As with any trading strategy, some creative money management can increase the profitability of this strategy by plenty. For instance, HOT in this example ran all the way to a $0.65 gain very quickly before pulling back to get stopped out at a much smaller profit.

One should expect to remain in these trades anywhere from 5 minutes to approximately 2 hours. Most of the time, during the 12 o’clock hour, even the strongest trends experienced a pullback. However, only a small percentage pullback in the market could be an opportunity for a continuation trade later in the afternoon. (eSignal, Advanced GET Edition, is an excellent tool for continuation trading techniques.)

The scanner works within eSignal, MarketCenter LIVE and the desktop companion of QuoTrek, as well as on its own.

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