The market open can be volatile and erratic. Many traders recommend staying away from trading around the market open.
Trading the open can, however, provide powerful moves and possible trade opportunities with favorable risk-versus-reward ratios.
While many markets are now open nearly 24×7 during the trading week, the day session open is when the larger market players may tip their hand.
The open may also provide clues about the day’s market direction.
Here’s a quick example:
Stock ABC closed yesterday at $40 per share. The stock is set to open the following day’s session at $40.50 per share. If the stock opens at $40.50 and begins to push higher, there may be underlying strength and the price may continue to rise.
If the stock opens at $40.50 and immediately begins to trade below the open price, the stock may have some underlying weakness and may look to fill the gap left from yesterday’s close.
If a market is trading above its opening price, it may pay to look for long trades. If a market is trading below its opening price, it may pay to look for shorts. That’s it!
The market open and where price is in relation to it can potentially provide traders with clues as to sentiment and market direction. Using the open, one may also be able to look for long or short trades with favorable risk/reward ratios.
While trading the open can be volatile and erratic, it may also provide some of the best trade set-ups for the day. Think of it as a time of discovery, where you are able to make huge gains within minutes, but a lose money just as fast. The important thing here is to understand what trading the open means, finding an effective strategy and coming up with a solid risk management to capitalize on it.