Monday, October 25, 2010

Understanding The Opening Range

Understanding my method is simple.  No matter what market you trade as long as it has some volatility you will find this strategy of value.  Although I am not the only person who views markets the way I do I chose to write this blog to keep myself in check.  

It’s amazing how easy your mind can wonder in an environment where there are very few rules.  This blog will hopefully hold myself accountable for my actions and keep me in line with what I have learned.  I plan on posting my trades here and help show people how my methods works.

The game of price discovery is by far the most interesting endeavor I have ever tried to play.  I continue to learn something new every day and strive to build trading mind.  After reading hundreds of books and spending thousands of hours watching markets I have come to realize there is no holy grail to investing. 
Rules that have been created by various professional investors work well until they don’t.  Fundamentals are logical but markets are not.  Technical analysis works often but not that often.  Do prices affect fundamentals or do fundamentals affect prices?

As you read this blog please note that the green lines represent the opening range.  For simplicity I will be trading on a monthly time frame where the opening range is defined as the first 4-5 days of the month.  The blue band of lines represents an area where there is support or resistance depending upon what side of the market you are on. 

Although not a science the strategy works well and aims to keep the trader on the winning side of the market.  If the blue band is below you then that is support, if it is above that is resistance.  The opening range is statistically significant because once you break that range and the market you are trading is able to hold above or below that opening range for half the defined opening range (2 days or so), the market will usually trend in the direction of the break.  (remember this is not an exact science)
As you continue to read this blog, you will see exactly what I am talking about.

Here we are getting close to the end of October.  Below is the S and P 500 in the month of October in a clear uptrend.

As you can see towards the bottom of the chart there is that blue line/band, now that is the top of the resistance band that I defined from the prior months price action (second line is band is below the definitions of the chart so therefore could not be shown).  Coming into the month of October can tell that the the market is quite bullish because the market had closed above the blue band.  As we watch the market gain its footing the opening range is defined and then broken in the direction that is of least resistance which is up.


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