(Note from Tim: Long-time Sloper Market Sniper contributed this post seven years ago, but it’s just as germane today as it was back then. He suggested I re-publish it, so here it is. I’d also like to remind you options folks that Slope has plenty of options-relevant content, so take a peek here for a quick guide).
I promised a post on just one thing that I use in my trading. This is but one very small piece of the “puzzle” but I find it VERY useful and you may as well.
As I am predominately a day trader, this is actually an extension of the daily Opening Range (OR) into longer time frames. If you are not familiar with trading using the OR, feel free to email me at Dutch302 at gmail and I will send you a pdf on the subject, called Trading The 10 O’clock Bulls.
What we use here is the monthly opening ranges and the six month opening ranges. The monthly opening range is defined as the absolute high and low of the first trading day of each month. This is regular session only. No data from pre-market or after hours trading is used. Why should we even look at this? Main reason, it is objective information.
1. It happens twelve times a year, every year!
2. It is a calendar specific defined price area on a chart.
3. Key players tend to respect and react to it, just like they do on the daily opening range.
4. It can be easily identified on all stocks and in all markets.
What you have created are two lines in the sand, the absolute high and low of the first trading day of each month. These two lines in the sand can act as 1) buy triggers; 2) stop loss triggers and 3) key resistance and support throughout the month.
With this information, you can create rules for entering trades. Some simple ones would be 1) if price is above the monthly OR, you can only go long and pass on any short/sell setups 2) if price is below the monthly OR you can only sell/go short and eschew any long/buy setups and 3) if price is within the OR, you just do not enter any trades.
You can also observe key consolidations as the length of time spent inside month OR’s. I use five trading days or longer spent within the monthly OR without breaking above or below it on a closed daily basis after the first trading day of the month. That is 25% or more of the month’s trading action. This can be powerful information.
Once you have defined these price areas each month, you can then put them on a longer term chart. See how each month’s OR relates to previous ones. Are they stacking above or below? Do the ranges intersect with previous ranges? This can give you an idea of trend as well as areas of price indecision.
The first trading day of each month could also be considered a key volatility day. They tend to be larger than the average true range (ATR). Rarely is it less than the ATR but often equal to the ATR. IF it is a tight range day, expect the rest of the month to be more volatile than “normal” as trading triggers get hit more frequently.
Lastly, we should address the six month calendar range as well. This you should do twice a year, in January and in July. The six month calendar range is defined as the first ten trading days of January and July. The same reasons for identifying these are the same as for the monthly OR’s. Add to those the following: these areas are also where longer time frame traders engage markets.
The moves around these six month ranges can be explosive as a result. It might be nice to know that when price approaches the previous six month range you have a heads up as to some massive support/resistance! Just might give you a heads up for potential breakouts and reversals! Combine your monthly ORs with your six month ORs to identify when the monthly aligns with the six month!
You might be surprised at what you may find as far as additional trading opportunities. Combine this with any methodology and/or indicators you are presently using…two last little hints: when the July Range is below the January range, then the key resistance area is the January range. When the July range is stacked over the January range, parabolic moves do tend ot occur!
There is a lot more to all of this but this is the basic information that can get you started.