My method of establishing a bias, or an expectation for the future trend direction, is done through six basic principles of price movement, as listed in my YTC Price Action Trader ebook series.
This requires prior price action as it's based partly upon analysis of previous bullish and bearish price swings and trends.
So what do we do when the market initially opens and we don't yet have sufficient price swings to determine our bias?
I'll attempt to demonstrate below using the open from a Crude Oil session earlier this week. As you'll see, there are no fixed rules and there is a lot of uncertainty. The charts provide little information. Analysis, as well as confident and decisive action, relies upon judgment and experience. And effective trade management relies upon your ability to drop or change a bias as soon as opposing information comes to light. Often you'll be required to adjust your bias as price behaves somewhat differently to your expectations.
While lacking experience in the early days, by far the better option is to simply avoid this period of time. Delay your first trade until the market has had time to establish sufficient swing highs and lows to confirm a trend and market bias.
But until you have the requisite experience, don't just blindly wait for the trend. Use this time to watch price movement and make your best call on the bias. You'll get it wrong a lot. But each time you do it you're learning and gaining the experience that is necessary for expert judgment.
Here we have the market opening on Monday, July 22nd, 2013.
Price opens the pit session at 108.52. Let's see what we know already. The following two charts show different views of price at the open; the first being the higher timeframe 5-min chart showing the pit session data only, and the second being the trading timeframe 1-min chart which includes the pre-session (overnight) data.
From the above two charts we are starting the session with the following information:
- 5-min chart: Price has gapped higher from the prior day's close, but still remains within the prior days range, nestled approximately midway between support and resistance.
- 1-min chart: The pre-session market has been an uptrend, leading into the open.
Both the gap up (albeit within the prior days range) and the pre-session uptrend combine to give us a "tentative" bullish bias at the open.
As price is well clear of both support and resistance at this stage, my expectation is for a continuation of the uptrend to the resistance area (IAW YTC PAT Principle 1).
From here I need to see strength in the rallies and weakness in pullbacks to confirm this initial tentative assessment. Please note: this does not mean we automatically buy. There will be NO TRADE based upon such flimsy information, unless the opening price sequence provides a really nice trap entry long via the lower timeframe chart.
While a continuation higher with strength will validate my initial bias, failure to do this will invalidate it. Bearish strength from the open will raise doubt about the opening analysis and will have me reassessing for a potential bearish bias. A stall with no conviction in either direction will have me reassess as neutral.
Let's move forward one minute.
Price has rallied, although not with strength, closing to form a mid-close range bar. The weak rally plus slight rejection off the highs keeps us bullish, but very cautiously. Again, a decision to trade would ONLY be made on an exceptional lower-timeframe trap entry long.
Confirmation of the bullish bias will require a break of the high of the opening range.
A break of the low of the bar, with acceptance in this area, would flip the bias to bearish.
Moving forward another candle…
The bears have come in with strength and completely smashed the bulls, providing us with a low-close bear bar.
The bias is flipped to bearish. Note that the pre-session uptrend is still intact, however a session open can completely change the pre-market sentiment. I'll usually (but not always) judge a strong opening range break as a better indication of trend and bias than a pre-market trend. So for me, the market is now in a downtrend with a bearish bias.
Just to complicate things, it's also reached support. There is insufficient information at this stage to gauge how price will interact with the support level. It could continue this bearish strength and smash right through. Or it could hold. For now, the bias is bearish and I'm awaiting the next bar to determine my expectations. What I'd love to see, before I'd consider a trade, is any sign that confirms my bearish bias, such as a weak pullback towards the opening bar lows which would have me searching the lower timeframe chart for an entry short (PB), or continuation through support and then a weaker pullback to the support-now-resistance level (BPB).
Alternatively, if support holds I'll seek a trap entry long (BOF).
It all depends on the following bars. Bias is bearish… but the future path is still very uncertain.
Let's move forward a few more bars and see what unfolded.
Price continued with a weak 3-bar rally and then another strong bearish thrust down towards support which broke the prior swing low. At this stage we have sufficient price swings and swing-highs/lows to "officially" confirm a downtrend. And the ongoing bias (future trend direction) can be determined in accordance with our usual six principles.
The pullback did offer a trade opportunity short for those who are comfortable taking a trade while the bias information is still incomplete. While it did not quite reach the opening range low, the lower timeframe price action formed a rectangle base just above the support level for several bars before breaking higher and rallying in a rather weak manner. Entry could be taken on the first failure to continue higher.
Most importantly, the risk on the trade was small.
So as we see here, the session open on Monday provided us with a tentative bullish bias, flipping to a tentative bearish bias on a break of the opening bar low, eventually leading to a confirmed bearish bias once we had a structure of lower swing highs and lower swing lows. Trade opportunity was available in the direction of our bias, for those comfortable taking an early entry based upon insufficient information.
Establishing a bias like this is really just a "best guess" based upon judgment and experience, as we reconcile the often conflicting information provided by pre-session trend, position of the open with respect to the prior day's close and range (high-low), position of the open with respect to support or resistance, width of the new opening range price bar, the direction of break of the new opening range high or low, and of course the strength or weakness of the opening price bars.
There is always uncertainty in any price action, however it's greatest at the time of session open and continues until such time as you have sufficient price swings to define a trend. Until you're comfortable with this process, avoid any desire to trade until you have a clear trend in place. But don't just avoid the charts. Try to determine the bias based upon the opening position, and then amend that bias as required as the ongoing price action provides new information. It's a process of skill development that comes only through exposure and experience.
There are other analysis techniques you can also consider. Combined with the above method, you may also start with analysis of higher timeframes and of the planned news schedule, in order to assess the likelihood of a trend or range day. This assessment may influence your opening bias. But that's the subject of another article another time.
We'll continue next week with another example of the above process, offering a variation on the initial opening conditions and the subsequent attempts to determine bias.
More to follow…