Opening Range Extension Methods

Introduction

Opening Range (OR) trading has been around for many many years. In the most general use, the OR and OR Extensions serve as Support and Resistance levels to trade into or against. There are no doubt scores of methods traders have devised to exploit breakouts, but this article focuses on the use of OR extension methods.

This article corrals the various opening range methods I've used and documented before, as well as adds a couple developed by other traders. The trader-tinker might enjoy experimenting with these to see for themselves which yield the most tradable ideas.

Background

When I first put elbow grease into learning the Market Profile (MP) method, I discovered that the MP term for the first 60 minutes of trading is called the Initial Balance. This is based on the idea that it takes 60-minutes for order imbalance, futures-cash arbitrage, and other transitory phenomenon to resolve itself and give direction to the remainder of the day's trading. Peter Stiedlmayer developed a ratio he considers of importance when using the 60m OR model to calculate extensions.

In addition to Market Profile, another significant opening range extension method is that of Mark Fischer, who popularized a method he called ACD. He has developed extensions to the opening range based on historical volatility for each market. The opening range portion of the method has been of great interest to me, particularly his view that there are different times for the OR for each market and instrument.

Additionally, various ideas sprang from the idea of using historical volatility, namely, using index harmonics, Fibonacci ratios, and simple doublings, which I call octaves, a musical (and mathematical term) for the same.

In summary, there are various approaches to calculating opening range extensions:

MP/Stiedlmayer extensions

Index harmonics, which are a fixed value form of long-term ATR

Fibonacci ratio extensions

Octaves, ie, doublings of the opening range

Ratio-calculated ATR (Average True Range)

ed: I have updated the ATR-based OR section here (this page, lower down).

Stiedlmayer Extensions

Sniffy and JTicks, traders at the Ensign Echat community^(*), have created a template and explanatory background for the these Market Profile based Extensions.
Links:
Stiedlmayer Extensions Description (page at dacharts.com)
Sniffy_OR_Ext.dat (right click to download)

Index Harmonics

Larry Pesavento develops the idea of index harmonics in his book Profitable Patterns for Stock Trading, where he discusses SPX and DJ index harmonics. After consideration, I believe these harmonics to reflect persistent long-term ATR multiples. Regardless, I found the SPX harmonics, which I adapted for use in trading the ES, to be very useful. For this purpose, I use the 15m OR that Mark Fisher uses in his ACD method.

ES
Unlike Sniffy's template, which holds off drawing H, L markers until the first hour is complete, this simpler DYOS marks the developing H, L values and, like the prior template, goes flat once the OR time is complete.
Links:
15m ES OR Description
15mES_OR_harmonicExt.dat (right click to download)

YM
I have no "that guru said so" reason to use 10m as the Opening Range time other than I find 60m too lengthy a time to wait for extensions to develop. It also works well with Alan's Box Trading Method, which I am just now using. A case could also be made that electronic trading has greatly shortened the "initial balance" transitory events. Having said this, it doesn't at all diminish the utility of the MP 60m OR.
Links:
YM_10mOR_harmonicExt.dat (right click to download)

Fibonacci Based Ratios

Early in January 2005, there was quite a bit of MP interest and discussion among Echat/Bline traders. Discovery was in particular extraordinarily helpful and generous in sharing his knowledge and use of the MP program and ideas. From these discussions evolved the following Initial Balance Fibonacci Extensions.
Links:
IB Fibonacci Extensions (page at dacharts.com)
IB_OR_FibExt.dat (coming soon, gotta convert a DYOS to a template)

Octave Based Ratios

If you've downloaded and compared the Harmonics and Fibonacci templates, you'll note that they are remarkably similar, with only the values in the Extensions DYOS changing. Why reinvent the wheel? Just put a different rim on it!

This template uses a 10m OR (ie, the Alan Box Method Bar 8 H and L). It is what I use for the YM futures and calculates extensions based on doublings of that range. It can easily be modified for other times or instruments.

Links:
YM_B8OR.dat (right click to download)

Ratio-Calculated ATR (New!)

When I first wrote this, getting ATR wasn't as easy as it is now with Ensign. Here is how to get automatically adjusted Extensions using ATR.

In Fisher's original ACD approach (my ACD implementaion here), OR extensions are based on a percentage of the Average True Range of the past n-number of days, depending on your goals and the instrument traded. For the ES/SPX in 2003, Fisher mentioned he was using 22% of the 30d ATR. As a simple adaptation, doublings of that ratio could be included as in the Octaves template above.

Ensign now allows a very simple way to calculate ATR: use a DYO on a DAILY chart to calculate the ATR and ATR-percentage ratio; write the resulting value into a transfer GV and use that on your intraday (eg, 5m, etc.) ACD Extension DYO. Here is how to do that.

The simple DYO shown below is put on a Daily Chart. Be sure to use a GV below 239 (this one uses 230) that is not used elsewhere. If you trade different instruments, be sure to change the GV value for each one. For instance, 230 for the ES and 231 for the YM. If you do not want to see the ATR value in Section 1, select "None" in the Message Location pull-down. Here is what the chart looks like (the signals are from the new ADX template overlay).

And here is the DYO of the Extension that use that GV. If you downloaded amgACD.dat from the Mark Fisher ACD article I wrote, open the DYO labeled "OR Extensions" and replace it with this one. Or, alternatively, download amgACD_ATR.dat to apply to the intraday chart ONLY. Voila, Fisher-style ATR extensions. Here is what the chart looks like

Next Steps:

Note: It is very easy to adapt any of these templates to other opening time frames by changing the "# min High (or Low) after First Open" callout in the first DYOS of the templates from 10 to 1, 5, 30, or 60 or whatever.

Market Profile
- CBOT Market Profile Overview (tons of educational materials, articles, and examples.)
- Ensign's version of MP is called the Price Histogram.
- Enthios' page has a nice summary
- Advanced users might like to try Discovery's workspace and template.

amg's interpretation of Mark Fischer's ACD Method.

LBR - Capturing Trend Days - further discussion on OR trading as it relates to trending

28 Apr 05: original
07 Sep 05: Updated to cross-reference other materials.
18 Mar 06: Updated to add ATR version

Opening Range Methods