An alternative method which allows one to be positioned on both sides is to set the triggers for the opening range breakout on both sides enabling one to benefit from both uptrend days and downtrend days. Once again Larry Williams has one of the simplest approaches which is to take the opening price on the session following an important range contraction event and then add (or subtract) a percentage of the previous day’s true range. For a trigger to catch a bullish move the percentage could be 80% of the previous day’s range and for a bearish move the figure could be to subtract 80% of the previous day’s range.
A lot of articles have been written about the exact methods to follow to determine the opening range breakout with some believing that there is a magical formula that allows you to be sure of capturing the trend days when they should occur. But we would suggest that the more refined triggers suffer from a spurious degree of accuracy. It is interesting that Crabel’s book has achieved almost mythical status with some traders and, since it is out of print, it can sometimes be found on eBay at prices measured in thousands of dollars.
We suggest that LarryWilliams has it about right when he describes the mechanics of playing the breakout – “it is really just as simple as that, a pickup in range, substantially greater than yesterday’s range implies a change in the current market direction . . . price almost always opens within the previous day’s range . . . if there is an expansion or moving away from the opening, price will probably continue in that direction.” This exactly echoes the point that John Paul Tudor Jones made in his interview with Jack Schwager. When markets speak with a united voice it makes a lot of sense to listen carefully to what they are saying.
There may not be the quantitative precision that one would need to program an algorithm to deliver the exact trigger points but essentially the simple rule of thumb is to put buy stops on either side of the opening price after an NR7 session that take into account a margin (based on the previous day’s range) that prevents one from any obvious whipsaws. The next thing is to remember to be patient and to hold tight until the end of the session. As we have seen in connection with the Coherent Closing Bias phenomenon it is vitally important not to be impatient on a trend day as the chances are very strong that if you are correctly positioned for the directional surge you will want to exit on the close as it will probably be near the best levels of the day from the point of view of profitability.
Read More : RANGE CONTRACTION AS A PRECURSOR TO TREND DAY
