Opening Range Trading Strategy
In this article, I will discuss the Opening Range Trading Strategy in detail. Please read our previous article, where we discussed VWAP Trading. You will understand the following pointers in detail at the end of this article.
- 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; they 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 happened. Any news is old; any reported earnings data is old information.
How do you 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 the price opens relative to the previous day’s 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 candles 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 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 start looking for serious traders trying to give the market a direction.
How do we 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 we avoid the initial move for entry (morning rap)?
The “Morning Specials” comprises two scenarios that can trap novice traders into believing the market is moving in one direction. Still, in fact, reversal is just around the corner.
- Often, you see the price 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 a trend is healthy when it’s made of average trend bars closing near the extremes, consecutiveness, and small corrections. But control has to be restored when the momentum gets out of control, such as a parabolic curve with gigantic bars without pullbacks. 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 who long now wind and exit
- The stock the operator demands 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 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. The initial range is defined 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, the next onward opening range means the initial range.
Why should you study Opening Range?
- Stocks at opening usually experience violent price action that arises from heavy buy and sell orders that come into the market. This heavy trading in the first five minutes results from the profit or loss taking of the overnight position holders and new investors and traders.
- Wise traders sit on their hands, 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 consists 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 a low volume, it suggests more strength on trend cont.
Depending on 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 patterns occur again and again
- Trend Day
- Double-Distribution Trend Day
- Typical Day
- Trading Range Day
- Small opening range
- usually opens with a wide range of 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 the price breaks out from the opening range, give a trending move in either direction
- WIDE opening range
- High and low of the day hold throughout 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 to analyze the opening range. The answers to these questions will give you insight into the stock’s current condition.
These are explained below.
- What price did you pay yesterday?
- What types of days?
Where does it occur with respect to the previous day’s range?
- Inside or outside of the previous day’s range. Identify the opening range and see where the opening range stands, above or below the previous day range (PDR)
- Is the 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 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 the upside or downside, successful crack or failure
The bias of the day(bullish, bearish, neutral)
- The opening range represents the bulls and bears establishing 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, it indicates that one side is stronger than the other. The bulls are in control when a stock moves above the opening range. This means the prevailing sentiment in the stock is bullish. How 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 above the opening price will likely go even higher. This is because of a new bull entry plus a short cover buy order, so after the reaction period, the market set the tone of the morning trend
- Check bias with the trend
#Tips that I am following
- Don’t buy below the opening range; buy above the opening range
- Don’t sell above the opening range; sell below the opening range
- This technique does not work all of the time
How do we 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 may have 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 something unusual is 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, the volume is also high, and the price remains 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 an 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,
- Suppose the Stock holds the open or goes sideways when indexing down. The stocks not trading below their OR low demonstrate 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 signs of strength shown in the stock relative to the index. Don’t short these stocks, 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 indicates some strength on the upside as the price is 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 Opportunities and Risk
Opening Range Trading Strategy Summary:
The Opening Range Breakout (ORB) strategy is popular among day traders. It involves identifying and trading a range established during the first few minutes of the trading session under the premise that the breakout from this range indicates the trend for the rest of the day. Here’s a step-by-step guide to using this strategy:
- Define the Opening Range: Choose a fixed time period at the start of the trading session. Common time frames are the first 15, 30, or 60 minutes. Identify the high and low of the price during this opening range to establish the boundaries.
- Wait for a Breakout: Watch for the price to break above or below this range. A breakout is typically considered valid if a strong move, accompanied by high volume, crosses the opening range boundaries.
- Entry Points: Enter a long position if the price breaks above the opening range high. Enter a short position if the price breaks below the opening range low.
- Volume Confirmation: Volume should increase significantly on the breakout to confirm the market’s commitment to the new direction. A lack of volume may indicate a false breakout.
- Stop Loss: Set a stop loss just below the opening range low for a long position or just above the opening range high for a short position.
- Profit Targets: Set a profit target based on prior price action and volatility. Some traders target a risk-reward ratio of at least 2:1. Alternatively, some traders will use a trailing stop loss to capture as much of the day’s movement as possible.
- Time Stop: If the breakout doesn’t move in the expected direction by a certain time, consider exiting the trade to limit your exposure, as the strategy is based on momentum.
- Size Your Position: Determine the size of your position based on the distance between your entry point and your stop loss to ensure that you are risking only a small percentage of your capital on any single trade.
- Backtesting: Before applying the ORB strategy in live trading, backtest it on historical data to determine its effectiveness in different market conditions.
- Consider Market Context: ORB can be influenced by overnight news, pre-market sentiment, and economic data releases. Always consider these factors before initiating a trade.
- Adjustments for Volatility: On days with expected high volatility (e.g., during earnings reports, FOMC meetings), consider adjusting the length of the opening range period and the size of your stop loss and profit targets.
- End-of-Day Rule: Some traders will exit any open positions from the ORB strategy before the market closes to avoid holding positions overnight, especially in markets that close for the day.
ORB is a powerful strategy that can capture significant moves, but like all trading strategies, it has a risk of loss. Traders must manage risk through the use of stop losses, proper position sizing, and a disciplined approach to entries and exits. Additionally, while the strategy can be applied across various markets, its effectiveness may vary depending on market conditions and the specific characteristics of the traded security.
In the next article, I will discuss the 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, YouTube Channel, and Facebook Group to learn more and clear your doubts.
About the Author: Pranaya Rout
Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout has very good experience with Microsoft Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core, ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing, Microservices, Design Patterns and still learning new technologies.