The Opening Range TradeThis is one of my favorite trades to make because of the outsized risk reward ratio that it can offer. We're talking 10:1 or better some days. We are going to look at an example of an opening range trade in the S&P 500 E-mini this past Friday, October 29, 2021.
What is the opening range? In the days of screen trading, the opening range can be considered the first 60 seconds of the normal cash session. This is when all the orders that were set to trigger on market open come flooding in. You can think of this as the moment when ALL of the institutional traders begin to step in and have an opinion about what happened in the overnight session. It is very telling therefore to see how big of a bite this opening range carves out of the orderbook. On a very directional day, this opening range will be left as the high or low of the session. This is even more likely to happen if we are opening with a gap from the previous day's range and value.
When to take an opening range trade:
1. The opening 1 minute range is narrower than 2x your risk tolerance for stop loss placement.
2. The opening range is left at the high or low of the session.
3. The opening range leaves a gap from the previous day's cash session.
Rule 1 and 2 must always be true, while you can think of rule 3 as an additional validator.
How to take an opening range trade:
See the chart above for reference. We are opening within yesterday's range, so no gap. We wait for the 08:30(central) 1 minute candle to paint itself as the market opens. As soon as the candle is complete we mark it's high and low. We have a fairly large range of 20 ticks. The next 1 minute candle dips back into the opening range before extending above it. Because this candle does not reach the center of the opening range, we can go long when it begins to extend above. We set our stop loss at the center of the opening range.
A note about stop placement: For what it's worth, I was taught, (and most traders I know do it this way) to use the ENTIRE opening range for my stop loss. What I've noticed however, is that if price action returns to the center of the range, there is a high probability of it violating the other side. Therefore, you can use half the opening range, thus cutting your risk in half, and the money saved will by far outweigh the handful of trades per year that you miss due to being stopped out.
You could have taken this trade for very little risk and carried it all the way to the close for a 10:1 reward over risk.
The opening range trade is simple to implement, and you won't have to wait very long to find out if you're right or not. Typically, if this trade is wrong then you'll be stopped out in a few minutes and can move on. If the opening range IS left as the high or low of the session, then you can expect a substantial move in your favor.
Now you have one more tool to keep in your toolbox. I hope it helps.
Trade well everyone.
