The open is simply the first moments of trading during a product’s main session. When a market opens, its position relative to previous trading areas and the type of trading activity that follows is potentially a great early indication of possible movements during the rest of the session. Many will overlook the open, yet for me it is just another piece of the day-trading puzzle.
Position of open relative to the prior primary session is the most relevant nearby reference. A market opening inside yesterday’s range is showing that at least for now it is initially accepting prices that were traded. This indicates a level of balance and shows less potential for a strong directional move. However, a market opening significantly out of the prior day’s range is more likely to show a change in perception from traders and create imbalanced directional moves. This can be in the form of further price exploration or rejection of change and competition for price, pulling price back quickly.
In addition to the prior day, position can apply to any longer term structural reference. An example of this is an open outside a trading bracket that covers several days or even weeks/months. This kind of activity can force even bigger players into action and move the markets drastically.
Session gaps are certainly worth mentioning, as they can also be important early reference. It’s true that many gaps between the close of the previous primary session and the following day’s opening price are often filled. If the size of the gap is significant, the information it holds may be useful. A gap on open completely out of the previous day’s range might show some conviction that value has changed and price needs to follow. However, a smaller gap size on open, still within the prior day’s range could more than anything act as a potent force in pulling the market back.
The way the market trades in the context of its opening position can depict the confidence and conviction of traders right from the open. It can also highlight the sorts of traders involved. A strong directional move for example is more likely to involve longer term players who are less concerned by specific price. A back and forth non-directional open is more likely to be participated in by short term and day traders.
Immediately strong directional – Pretty much right off the bat, the market powers off in one direction. A move like this is a strong gauge of movement
Check then strong directional – Before entering strongly, some traders might want to see what the action is like when the market moves in one direction. If they think the move isn’t too convincing, they then pile into the market at it moves the opposite way.
Directional fail – The market moves one way only to encounter strong counter action, which makes it reverse back to where it came from.
Non- or low-directional – Not much conviction initially. There’s no strong consensus on a different value from current prices and so the market moves up and down. Sometimes you notice it might drift one way in an up and down manner. This to me is similar. Longer-term players may not want to enter and so much of the trading is by day traders. The reason for the drift is that many day traders now have been forced to trade with a directional view. If there is a consensus, the market can still drift one way without having strong conviction.
POSSIBLE SUBSEQUENT BEHAVIOUR
Of course the action of the market needs to be subsequently monitored with price objectives set and trading observed. But with the context of location, the vigor of the market from the open can give a strong indication of how much participants are likely to push the market and in which direction. A strong open is likely to be follow through with additional trading in that direction later on in the day, whereas with a weak open the market often has the chance of moves one way and then the other throughout the day.
The caveat is to say that if the participants of the market you are trading are waiting for a highly anticipated figure release or a rate announcement or example, the open may hold little clear significance due to traders not being willing to commit to a position early on. After the release has taken place, it’s then the market really starts to move.
The open type can give you an idea of later movements. What must always be taken into account however is that anything can happen during the day and unexpected news can quickly change the picture.
To see the video example as I go through the open from 11/23/11 in ES, check out: