Opening Range Trading Strategy
In this article, I am going to discuss the Opening Range Trading Strategy in detail. Please read our previous article where we discussed VWAP Trading. At the end of this article, you will understand the following pointers in detail.
- Understanding market sentiment
- Understanding opening range
- Opening range comparative analysis
- Opening range trading strategy
UNDERSTANDING MARKET SENTIMENT
- Different market sentiment is related to the prospects of a specific company. There is also sentiment based on the company’s industry group, and there is sentiment regarding the condition of the whole market(corona effect)
- The force behind any price move is the market’s mood or sentiment. Not news or earnings, there are already happening. I mean old. In good news prices fall why?
- Sentiment represents bullish or bearish feelings for the future prospects of a stock. This means the current movements of a stock’s price are dictated by what the market expects will happen in the future, not what has already taken place. Any news is old; any reported earnings data is old information.
How to find out the market sentiment in the chart?
- Through the Principle of the Opening Range (OR) trading approach
- You should look at a stock’s price action and volume. And find out what it demonstrates that its sentiment is bullish, bearish, or undecided.
The Opening Price is the first trade of the day. The balance point of the current day. Daily open prices act as support and resistance.
The Importance rules
- Don’t try to buy below the open on expected up-close days.
- Don’t try to sell above the opening on expected large down days.
What do we study at the opening?
- Where price open relative to previous day high and low
- Where is the next support or resistance level?
OPENING CANDLE in Opening Range Trading Strategy
OPENING THE CANDLE SUGGESTS THE SENTIMENT FOR THE DAY. IF FORMED AT KEY SR LEVEL(PDL/PDH/LSL/LSH)
- Clean, Strong wide range candle with volume indicate strong market sentiment
- PIN BAR FROM PDH/PDL also suggests strong sentiment
The proper knowledge of opening a candle and the price action around a reference point is very crucial for successful trades. Follow the trend
Two types of player
- Smart money
The market always looks to handle the current business first. So the initial move will usually tell us about,
- Who were the trapped traders from yesterday scampering for an exit today?
- Who missed an entry yesterday and is rushing into the morning markets?
- Who is driving the price?
once the current business is taken care of, we can then start looking for serious traders trying to give the market a direction.
How to know the above point?
By analyzing the direction of move and volume and where the price is?
Let’s analyse an initial up move
- short covering rallies(discussed in volume price action analysis video
- Actually buying up move
- Morning trap
Why should avoid the initial move for entry (morning rap)?
The “Morning Specials” is composed of two scenarios that can trap novice traders to believe the market is moving in one direction, but in fact, reversal is just around the corner.
- Often you see price is moving in one direction very strongly from the opening bell. The momentum is so strong, that it creates a parabolic curve. It makes you regret not entering early. But don’t get trapped, this parabolic move often gets reversed. The psychology behind this is that trend is healthy when it’s made of average trend bars closing near the extremes, consecutiveness, and small corrections. But when the momentum gets out of control, such as a parabolic curve with gigantic bars without pullbacks, control has to be restored. Too fast and too big is a problem because there is no consistency. The market is balanced, where both bulls and bears can profit. If the price is only favoring one side, resistance will be met. Keep this in mind when you see volatile movement in the early morning. When you see clear signs of failure or exhaustion, counter them.
- The operator will run the price down fast from opening and or below any reference point this action creates interest among the traders and brings in selling. Smart money objectives are
- To test the selling power of the public also who long now wind and exit
- The stock which in turn is demanded by the operator and gives him a chance to buy a little long stock and put out some long orders.
The initial indication of the trend change
- Down opening from a strong close or up opening from a week close indicate may be the beginning of the change of the trend either way(or type 2)
- When the pullback is deeper and stronger than expected, let it roll over. Wait for test
- Low volume move
Opening Range(OR) and initial range(IR)
The opening range is defined as the difference between the previous day close to today’s high or low, as shown on the left side of the image. Initial range defines as the difference between the first high and low of the day. So assume the opening range and initial range have the same meaning. So next onward opening range means the initial range
Why you should study Opening Range?
- Stocks at opening usually experience violent price action that arises from heavy buy and sells orders that come into the market. This heavy trading in the first five minutes is the result of the profit or loss taking of the overnight position holders as well as new investors and traders
- Wise traders sit on their hands and watch for the opening ranges to develop and allow the other traders to fight against each other until one side wins.
- Then develop a trading plan in the direction of the opening range breakout
What is the Opening Range (OR)?
- The Opening Range Trading Strategy is consisting of price and volume as inputs to determining the current bias ( bullish, bearish, or neutral of the stock’s trading activity)
- The Opening Range Trading Strategy is the difference between the first high and low of the day.
- How to find high and low? At least one candle should be completely against the trend. If that candle has low volume it suggests more strength on trend cont.
Depending open the Opening Range, we can predict what types of days may occur
There are various types of day patterns, but generally these four types of day pattern occurs again and again
- Trend Day
- Double-Distribution Trend Day
- Typical Day
- Trading Range Day
- Small opening range
- usually opens with a wide range candles or pin bar candle
- sharp move at opening with high volume. Consecutive healthy candle
- each period will have a higher high and higher low
Double distribution trend day
- Relatively inactive during the opening range
- Narrow opening range(accumulation or distribution going on)
- When price breaks out from the opening range give a trending move in either direction
- WIDE opening range
- High and low of the day hold though out the day(BOF at both ends)
- Price rotated up and down without any clear directional conviction during the day
- Very wide opening range
- usually opens with an open drive or open test drive
- sharp move at opening with high volume with very big candle candle
- price generally trading around either day high or day low
How to analyze Opening Range?
We will ask five questions for analyzing the opening range. The answers to these questions will give your insight into the stock’s current condition.
These are explained below
- What price did yesterday?
- What types of days?
Where does it occur with respect to the previous day range?
- Inside or outside of the previous day range. Identify the opening range and see where the opening range stands, above or below the previous day range (PDR)
- Is market structure change
- Identify the opening range and see whether the opening range is low at support or the opening range is high at resistance.
- Why is it important to establish whether or not the low (high) represents significant support (resistance)? When you are trading using the OR you will approach each day assuming that the OR high and low are likely to be important price levels
- If you knew that a particular price level was likely to be either the high for the day or a significant breakout point, wouldn’t you want to focus on that stock and that price level? You don’t need to know anything about the OR to understand that.
- Where was the last SR crack, on upside or downside, successful crack or failure
The bias of the day(bullish, bearish, neutral)
- The opening range represents the bulls and bears establish their initial positions for the day.
- The most basic application of the opening range principle is that when a stock moves away from the opening range indicates that one side is stronger than the other. When a stock moves above the opening range the bulls are in control. This means the prevailing sentiment in the stock is bullish. The manner in which the stock breaks above and trades above the opening range will indicate the strength of the bullish sentiment.
- Don’t buy aggressively until this stock heads upward. Those stocks that trade back above the opening price are likely to go even higher. This is because of new bulls entry plus a short cover buy order .so after the reaction period market set the tone of the morning trend
- Check bias with the trend
#Tips what I am following
- Don’t buy below the opening range, buy above the opening range
- Don’t sell above opening range, sell below the opening range
- This technique does not work all of the time
How to find the bias of the day?
- Identify how much a stock retraces relative to how much initial move in the opening range. And pay attention to the reaction and how stocks tend to act during this period
- Flat pullback (price consolidates high of the day). Look to see if most of the trading is near one end of the range. Has the stock spent most of its OR period near the highs of the OR? If so, this is a bullish Strong buy signal.
- If a stock goes from an up opening and then sells off and remains beneath its opening price after the morning pullback has stabilized, it’s possible that the stock has reached its high of the day.
- however, if a stock gaps up and pulls back during the morning pullback, but then rallies to break above its opening price, the mark-up was probably not a trap gap and the stock should make new intraday highs
Volume activity for the entire Opening Range?
- Big volume during the OR means there is something unusual going on and that is exactly what you want if you are looking for a big breakout day
Note: Volume it is important to watch the volume carefully when determining if the price will continue in the direction of the opening range
- If the stock is up and the volume is also high and also the price remain above its opening price after the early morning pullback, it is an excellent sign that the stock has further to go on the upside.
- If high volume appears after a up move and the stock immediately comes under selling pressure, chances are that this volume was a seller
Opening range relative strength with respect to sector and index
Let’s understand with a bullish relative strength with respect to index or sector. When the market takes out its OR swing low most stocks will follow suit and take out their respective Opening Range low
Relative to the parent index,
- If the Stock holds the open or goes sideways when indexing down. The stocks that do not trade below their OR low are demonstrating bullish intraday relative strength. If the market does not follow through in its breakdown the strong relative strength stocks are the best candidates for an immediate rise in price
- If the Stock up
These are the sign of strength shown in the stock relative to the index, don’t short these stock, but patiently wait for the index to show some strength or turn from down to up, then go long
1 SECTOR TEST OPENING RANGE LOW
M&M -higher low(indicate bullish)
MARUTI- also test opening range low
AMARAJABAT- break opening range low(bearish)
2 sector making higher low but near opening range low
M&M- stalling at opening range high (bullish)
MARUTI-making lower low (bearish)
AMARAJABAT- price below opening range low(bearish)
The sector is indicating some strength on the upside as the price struggling to close below the opening range low and make a higher low. So want bullish stock for long entry
M&M Only showing a bullish signal compared to the other two stock
The Opening Range Provides Price Points for Identifying Opportunity and Risk
Please watch the following video if you want to learn and understand the Opening Range Trading Strategy concept in a better way.
In the next article, I am going to discuss Opening Range Breakout in detail. Here, in this article, I try to explain the Opening Range Trading Strategy in detail. I hope you enjoy this article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.