3 methods for trading an opening range

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Updated: 28 August 2020

One of the most active and volatile periods during the trading day is the opening range period. This period is defined by the high and low that occur after the market has opened for the day, typically 30 minutes to an hour after opening. To recognize the opening range, you will need to identify these high and low points, along with the highs and lows from before the market opened. Various trading strategies can then be used to plot entry points on the price action chart and predict the trend for the day.

Analyzing the opening range

Several tools can be used before implementing your chosen strategy. Measuring the opening range before plotting trades is an essential first step. This can be done with the help of two candlesticks on the chart: the last candlestick from the previous day’s session and the first one of the current day. The size is then measured as the distance between the high or low of the previous closing and the high or low from the current day’s opening.

It is vital to note the price action’s breakout from the range because this can determine the rest of the day’s price direction. The chances of it continuing in that direction are high and therefore make for a good opportunity to plot entry points.

Strategy 1: Early-morning range breakout

This method is common for trading an opening range and allows traders to identify the direction by locating the boundaries of the price action gap. Breakouts during this time of the day are less risky than those later in the day as less experienced traders are active at this time. Nevertheless, stop losses are always a wise move according to most forex advice, and they are best place at the gap’s mid-point. Unless the price action appears to continue in the trend, you should hold your trades for a price move that is roughly equal to the gap size.

Strategy 2: Buying on a gap pullback

This strategy is best suited to bullish gaps as they can indicate a reversal in the price movement direction. If this occurs and the price goes in the opposite direction of the gap, a pullback occurs; in a bullish situation, the pullback will be bearish. In order to execute this strategy, you need to predict where the pullback will end. You can determine where to buy on the pullback by identifying the reversing candlestick pattern. You will then need to wait to see a confirmation of the trend, after which you should enter a long position. Any stop losses are best placed under the opening range’s lowest point. This trade can be held for a bullish move roughly equal to the gap size.

Strategy 3: Reversal of the gap

If the opening range experiences a breakout in one direction and a price gap occurs in the opposite direction, a gap reversal is present. If a gap reversal occurs and the price drops below the lowest point of the range, the gap is classified as bullish. Alternatively, if a gap reversal occurs and the price goes above the highest point of the opening range, the gap is classified as bearish. A trade should be placed when the opposite level experiences a breakout. As with the first strategy, a stop loss order should be placed at the opening range midpoint, and the position can be held for a price move equal to that of the gap size.

Exit strategy

The best way to find an exit indicator is to monitor the time and sales of the price action movement, as this is a fast and reliable method. Even with stop losses, you should maintain clear exit strategies.