Can an opening range be used to determine type of day?
Can you use the opening range of an instrument to predict with any efficiency the type of day that may result?
For instance, if you look at the first hour of the pit session in CL, and you look to see if the close of the bar after 1 hour is higher than the opening session price, can you make any predictions that the day will be an up day? Another example, if you examine the actual range (ticks) of the opening range, can you make any prediction as to whether or not there will be a volatile or range-bound day?
There is another thread here that talks about Opening Range Projections, but that is more of a support/resistance/fib indicator and not what I am looking for. I'm trying to formulate a statistical spreadsheet to see if its possible to make predictions that the day will close higher/low, be volatile or range bound, based on an opening range.
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Some unfiltered thoughts on opening range breakouts
I am currently working on this. Actually planning to develop a trading system around this. Here are some unfiltered thoughts. Will come back when it is better structured.
Low risk conditions
Like to enter trades during of after low volatility. Consider a trade like an option, where part of the fee is not payed upfront but comes as the risk that the trade turns sour. If volatiliy is low, I can use narrower stops and reduce my risk.
Box-in-a-box or Martryoshka setup
I love two types of setups. Breakouts from trading ranges and 2B (or turtle soup) setups. Both work best as Martryoshka setups. If a breakout from a smaller timeframe consolidation triggers a breakout from a larger timeframe consolidation, this should work like an avalanche and you have made it. For 2B setups, I look for a small divergence within a larger divergence, or to use the terminology of Al Brooks, I look for a second entry within a larger timeframe second entry or a bear flag. Applied to my opening range breakout concept, this means that I would prefer that the prior day had rather low volatility and not high volatility. A wide ranging day might be followed by a balancing day, which confirms the newly established price level or a retracement which is needed to confirm the move. A typical example of a Matryoshka setup is the cup-and-handle pattern. So one of the criteria for trading opening range breakouts is the volatility prior to the setup, in particular the night session range and/or European session range from 3:00 to 6:00 AM ET and, of course, the range of the prior day.
Analysis of hourly expected volatility
Human behaviour divides the day into different volatility zones. This can be measured via the hourly range. The attractivity of the opening range breakout is, that it precedes herding. The herding generates positive feedback loops and increased volatility that can be exploited. For index futures the same applies to the afternoon after the typical fake move that occurs around 2:30 PM ET. Currency futures do not follow the same cycle, but only show increased volatility in the US morning, particularly when New York and London overlap into the London close. I have not examined this for CL, but believe that the morning of the RTH session shows the highest volatility.
Analysis of volume
Volume shows interest and should be analyzed for the per-opening period and the opening range period as well. This is certainly tricky, as what counts is relative volume, relative to the news, relative to the typical day-of-week volume, relative to the volume of the prior day, etc. I have not found something simple here so far, but I am quite convinced that it has an impact.
Sentiment and Expectations
The analysis needs to integrate sentiment indicators. Thinking about modified put/call ratios like the ISEE indicator. If a breakout occurs, it is best, if the majority of the traders are trapped. Expectations are dependent on expected news releases. I think this is one of the most difficult, but most important subjects to integrate.
Using a trend filter based on the work of Sylvain Vervoort. Second filter based on linear regression.
Rejection of the opposite scenario
In any case I need two valid scenarios - one up and one down. Prior to any brekaout the opposite scenario should have clearly been rejected by price action. The best possible reaction would be a bull and a bear trap.
Breakout point, target and stop-loss
I think that the stop-loss does not need to be on the other side of the trading range. If the tiing for the breakout is right, a stop-loss could be set at a 75% position within the trading range. If price move considerably below the 50% line of the trading range, the breakout scenario would be no longer valid. The breakout point will be different for every instrument. This needs to be empirically tested.
I think it is possible to trade a 5 min, a 15 min, a 30 min, and a 60 min opening range. For currencies the longer end looks better, but for index futures, trades can be based on the breakout of a 5 min bar as well.
An old concept revisited, can it be adapted to the current markets?
Trading the opening range breakout is an old concept, so it will not easily work. I think that it has a solid kernel but needs to be adapted to ever changing market conditions. The solid kernel is the risk side and the fact that it is based on repetitive human behaviour.
Still reading the book of Toby Crabel, who has done some serious statistical analysis, probably no longer valid today. I also plan to have a look into the book by Mark Fisher "The Logical Trader Applying a Method to the Madness". Do you know this book? Also I have found a link to a free download (just some basics), which is here:
For index futures you can trade the increase of volatility after the noon break in a similar way. This is not possible for currency futures as volatility typically declines after the London close. I have not have had a look at houlry volatility of crude so far.
Just coding an indicator that displays opening range for different instruments, based on RTH session open and the choice of a period for the opening range. Also want to integrate prior ranges, such as European session, night session and prior day.
Now to answer your question (in the end)
I think if you take the opening range, the range of the prior day(s), sentiment, expected news, a trend filter, volume of pre-opening period, volume of opening range, a prediction should be possible with a probability allowing for a profitable setup....
Last edited by Fat Tails; August 1st, 2010 at 04:10 PM.
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Marc Fisher's ABC system (A-Up etc.) is a useful tool. He has a number of ideas which can help frame the price action and can also be automated.
One problem though is that in the current market many big moves tend to happen overnight. So this whole concept of opening range etc. is becoming meaningless.
Today we had a +25 day in ES but the intraday range was much smaller and the day was pretty much done by 10:15 AM. All your opening range techniques could be thrown out of the window as you waited for the paint to dry.
I think these techniques will still work on individual stocks and perhaps CL.
You are very lucky to be in Europe in the current market environment since you can trade multiple markets and catch most of the moves.
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Well 8:00 AM Eastern is 5:00AM for me; still too early!
BTW, your post above provides a form of context for a trade. One of the most important aspects for the a trade is the context and for me the holy grail is to measure the context for the trade using a program. I had opened a thread earlier on this but did not get too many responses.