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- Using the Opening Range and Key Price Pivot Points for profit.
- Presented by Daniel Ervi
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- The opening range is the distance covered from the highest price to the
lowest price during a predetermined amount of time from the start of the
trading day.
- For example, if the market opens at 9:30 AM and we wish to evaluate a 15
minute opening range, the time from 9:30 to 9:45 would be analysed.
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- A Key Price Pivot Point is a price that acts as a threshold between
taking on a bullish or bearish stance.
- They can be considered support or resistance points, and in many ways
act as such.
- When multiple Price Points “cluster” together, these areas should be
considered very significant, as price will most likely bounce off or accelerate
through them.
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- The opening range and pivot point concepts have been elaborated on by
many of the great technical analysis pioneers.
- They have been used as the basis of many of the so called “Black Box”
trading systems, some of which sell for over $3000.00 US.
- The opening range idea has continually surfaced in recent years,
stressing the importance of paying attention to this critical period of
the day.
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- Tony wrote the one of the first works covering the concept in the early
90’s called “Day Trading with
Short Term Price Patterns & Opening Range Breakout”.
- In the book he details the results of going long or short a contract
after a predetermined amount above or below the opening price.
- He currently manages over $500M US funds using concepts derived from his
book.
- This work has now gone out of print and has recently sold on eBay for
over $1500.00 US.
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- Larry used the opening range concept as part of his Volatility Breakout
systems, popular in the 1970’s-1980’s.
- In his 1999 book “Long-Term Secrets To Short-Term Trading”, he expands
on the opening range concept and brings up-to-date his previous research
by conducting a number of TradeStation tests.
- He considers the Volatility Breakout system to be the most robust form
of market-timing he has ever encountered.
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- John uses opening range studies as the basis of his “Directional Day
Filter” which has a 75% accuracy of classifying a trend-day.
- The indicator is detailed, along with some other great ideas, in his
2001 book, “Four Steps To Trading Success: Using Everyday Indicators To
Achieve Extraordinary Profits”.
- The indicator continues to work well and is a concept I use in my own
daily trading
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- Mark uses the opening range and pivot pints as a significant portion of
his ACD method of trading.
- The opening range is analysed and key levels are used to provide area of
support and resistance that when violated offer excellent risk to reward
characteristics.
- Concepts covered in his 2002 book “The Logical Trader” form a major
portion of my current E-Mini futures trading system.
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- The focus of this presentation is concepts that can be used on the
intraday timeframe. Some concepts
still apply to longer-term trading however.
- Prior to discussing how to use the opening range in our trading we need
to define some key terms and concepts.
- As a short form, OR will be used to represent the words Opening Range.
- A number following the letters OR represents a period of time considered
in the study.
- For example, OR5 would means the 5 minutes after the opening bell, and
OR15 would mean the 15 minutes after the opening bell.
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- The Directional Day Filter is a simple concept that can improve your
ratio of winners to losers. It
categorizes the days into trend days and consolidation days.
- To calculate it, you take the highest high and lowest low of the first
5 minutes of the trading day and add them together, then divide by
two. Plot the result as a
horizontal line.
- One hour into the trading day look at the number of bars that are above
the line and the number below. If
more bars are above, you have a bullish bias for the day, and should
only go long. If more bars are below, you have a bearish bias for the
day, and should only go short. If it is about equal, you can expect a
sideways (consolidation) day.
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- The ACD method is a way of using key price levels as areas of support
and resistance. You can use these
levels in a multitude of ways, such as a filter for long or short
positions generated by another method.
- The basic concept of ACD is that you adopt a bullish bias if price is
above your ACD High level, a bearish bias if price is below your ACD Low
level, and a neutral stance if price remains in between the two levels.
- The ACD Method dictates that your stop placement is always the other
ACD level. So if you are long
after price crosses the ACD High level, the ACD Low level is where you
place your stop. You will always know where you are wrong and need to
exit your position.
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- Point A
- An “A Up” or “A Down” is made when price violates the Opening Range + an
extra amount called the offset
- To calculate the ACD levels you use this formula:
- ACDHigh = OR15H + Offset;
- ACDLow = OR15L - Offset;
- You can make only one A point per day.
For Example, if an A Up is made, you can not have an A Down.
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- Point C
- An “A Up” or “A Down” is made when price violates the Opening Range High
+ and extra amount called the offset, and remains there for at least ½
of the opening range time
- To calculate the ACD levels you use this formula:
- ACDHigh = OR15H +
Offset ACDLow = OR15L - Offset;
- You can make only one A point per day.
For Example, if an A Up is made, you can not have an A Down.
- In the chart below, you have a failed “A Up” and a valid “A Down”
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- Rubber Band Trades
- A “rubber band” trade is made when price fails to break through the ACD
levels, or breaks through but doesn’t stay there for a sufficient amount
of time.
- On the chart below, you would go short just below the ACD High with a
stop at the ACD High line. Your
target is the other end of the channel, or the ACD Low line.
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- Pivot Points
- The Pivot Points are used in a very similar fashion to the ACD
levels. The Pivots are calculated
and plotted as a range that acts as support and resistance.
- It is often useful to view the open in relation to the pivot points, as
this sets the tone for the day.
If the market opens below the pivots, that is often bearish, and
if it opens above the pivots, that is bullish.
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- Longer-Term Trades
- The concept of using a significant price level as a gauge of the market
you are trading is a valuable one.
Those that trade end-of-day can use the concept of “First Trade
Day Of The Month” to trade with.
Many stocks will establish their monthly high or low on the first
day of the month, giving you a perspective of how the rest of the month
will fare.
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- The following charts detail about one month’s worth of intraday trading
using 2 minutes bars. The
charting program used to generate these was the realtime version of
AmiBroker RT. The data was
provided by eSignal.
- The AFL code (indicator code) used to generate these studies is
available from the TASUG website, however you will need to download my
DateTime plugin DLL for AmiBroker in order for the studies to work. The plugin simplifies many of the
time-related functions that I needed to perform.
- These charts you will be looking at are the same charts I use for day
trading the E-Mini S&P500 futures contract. I use them combined with Interactive
Brokers Traders Workstation (my broker, http://www.interactivebrokers.ca)
and Bracket Trader (Rapid-Order Entry, http://www.bracket-trader.com),
of which I will show screen captures of later in the presentation.
- A note to aspiring E-Mini traders:
Be careful. The E-Minis
are seductive, but you should start on something a little slower moving
first. You’ve been warned!
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Notes
