Opening Range Trading Strategy

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Back to: Trading with Smart Money

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.

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1. Understanding market sentiment
2. Understanding opening range
3. Opening range comparative analysis
4. Opening range trading strategy

UNDERSTANDING MARKET SENTIMENT

1. 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)
2. 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?
3. Sentiment represents bullish or bearish feelings about a stock’s future prospects.
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.

Opening price

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

1. Don’t try to buy below the open on expected up-close days.

2. Don’t try to sell above the opening on expected large down days.

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What do we study at the opening?

1. Where the price opens relative to the previous day’s high and low
2. 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

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Initial move
Two types of player

Smart money
Retailer

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 who
are trying to give the market direction.

How do we know the above point?

By analyzing the direction of the move and volume, where is the price?

Let’s analyse an initial up move

1. short covering rallies(discussed in volume price action analysis video

2. Actually, buying up move
3. Morning trap

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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.

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1. 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.
However, control has to be restored when 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.
2. 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.

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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.

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Why should you study Opening Range?
Stocks at opening usually experience violent price action, which arises from heavy
buy and sell orders. This heavy trading in the first five minutes results from the profit
or loss taking of 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 for 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.

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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

Trend 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

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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

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RANGE DAY

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

Typical 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

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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.

BIG PICTURE
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

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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

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 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

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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.

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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,

1. Suppose a 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 price rise.
2. 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

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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
Entry

1. Breakout
2. Pullback
3. Reversal

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. 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.

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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.

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