Unlock the Market’s Potential: Harness the Power of the Opening Balance Range and Statistical Analysis.
Introduction
In today’s financial markets, the first hours trading of each session sets the stage for the rest of the session. This critical period, often referred to as the “Opening Balance” (OB) or the “Defined Range” (DR), can offer valuable insights into potential market direction.
But how can we efficiently utilise this valuable information?
The Opening Balance Range model provides the answer:
Born from statistical analysis, the OB Range model gives traders a robust framework for understanding and predicting market price movements. The model’s focal point is the first hour trading range of each major market session – Asia, London, and New York. This critical range is known as the “Opening Balance Range” (OBR).
The OB Range model uses granular, 5-minute timeframe data to define two areas within the OBR: the “Implied Opening Balance Range” (IOBR), and the Opening Balance Range (OBR) itself. We analyse these ranges statistically, compute and store expansion and retracement data and use the insights to make strategic trading decisions.
So, why is this significant?
Historically, a substantial number of trading days adhere to a particular rule: once the market direction for the session is confirmed (by a price breakout above or below the OBR), up to 90% of the time the opposite side of the OBR is not breached until the start of the next session . This principle, called the “Opening Balance Rule,” forms the cornerstone of the model and gives us an edge in the markets.
Key benefits of the OB Range model are:
- Improved Decision-Making: By leveraging statistical analysis and historical data, the model helps you make more informed trading decisions.
- Risk Management: Understanding the likely boundaries of market behavior allows for better risk management and stop placement.
- Strategic Trading: By providing insights into possible market direction, our model assists you in planning trades effectively.
- Historical Analysis: The model enables traders to study historical price action and behavior in detail. This can be extremely useful when planning future strategies.
- Specificity: The model provides specific levels to observe, rather than vague or broad indications, thereby allowing more precise strategies.
With the OB Range model, we’re inviting you to redefine your trading strategy, better manage risk, and unlock the full potential in your trading.
Let’s explore the model further…
Key Terms & Abbreviations
In the OB Range model, we use a number of terms and abbreviations to describe various components. It’s crucial to understand these terms as they form the bedrock of the strategy.
Here are the definitions:
OB (Opening Balance): This refers to the first hour of trading for each major market session. We consider three primary sessions: Asia, London, and New York.
OBR (Opening Balance Range): This is the range of price during the OB. It is defined by the highest and lowest prices achieved during the first hour of the session.
IOBR (Implied Opening Balance Range): This is a subset of the OBR. It’s defined by the highest and lowest opening or closing prices during the OB.
Asia / London / New York: These represent the three major market sessions. The Asia session begins at 19:30 EST, the London session at 03:00 EST, and the New York session at 09:30 EST.
SD (Standard Deviation): This is a statistical measurement that depicts the amount of variation or dispersion of a set of values. We use SD to calculate the volatility of the market and predict potential price movements. All standard deviations are fractions or multiples of the OBR.
HoS (High of Session): This is the highest price reached during a particular session.
LoS (Low of Session): This is the lowest price reached during a particular session.
OB Confirmation: This is when a 5-minute period closes outside of the OBR. This confirms the market direction for the session. If the confirmation is above the OBR, it’s termed “long”. If it’s below, it’s termed “short”.
OB Rule: A principle stating that once the market direction is confirmed, the opposite extreme of the Opening Balance Range will not be breached before the start of the next session.
Median, Mean and Mode:
Median: is the middle number, when in order (take for example: 1, 2, 3, 4 ,5. in this example 3 is the median, it’s the number that falls in the middle of the range) .
Mean: is the average of all of the numbers (take for example: 1, 2, 3 (1+2+3 = 6. 6/3 = 2). In this example 2 is the median, it’s the sum of the data set divided by the number of data points in the set).
Mode: is the most common number (take for example 1, 2, 3, 4, 4, 4, 5, 6. In this example 4 is the mode, as it’s the most common number in the range).
Understanding these terms is the first step towards effectively utilising the OB Range model for strategic trading decisions. In the following sections, we’ll dive deeper into the workings of the model and how you can use it in concert with the SnapShot app to enhance your trading strategy.
Sessions, Opening Balance and Confirmation
Sessions:
The 3 sessions are:
Asia 19:30 to 02:00
London 03:00 to 08:30
New York 09:30 to 16:00
*all times are Eastern Standard, New York time!
Opening Balance:
The Opening Balance is the first hour of the trading session.
The Opening Balance Range (OBR) – This is the range of price in the Opening Balance created by the highest high and the lowest low.
The ‘implied opening balance range’ (IOBR) – this is the highest opening or closing price of a 5 minute period in the first hour of the session.
Here this is illustrated by an indicator available on Tradingview called ‘DR/IDR’, the solid grey line represents the OBR and the red dashed line represents. the IOBR
Each candle on the chart represents 5 minutes of price data. Green candles are up candles, black candles are down candles. The body of each candle represents the opening and closing prices of the 5 minute period. The tails of the candle represent the high and the low of the 5 minute period. The gray shaded area is the first hour of trading. The red dotted line represents the ‘implied opening balance range’ (IOBR) and the solid line above and below is the ‘opening balance range’(OBR).
Confirmation Direction
After the end of the first hours trading is complete we are waiting for ‘confirmation direction’.
Confirmation direction is the closing of a 5 minute period outside of the OBR, either above the range or below the range. If it closes above the range it’s defined as ‘confirmed long’. If it closes below the range it’s defined as ‘confirmed short’.
Here’s another image to illustrate this:
In this image we have a confirmation long as represented by the green triangle above the candle in the yellow circle (the green triangle is painted by the Trading View indicator).
This has confirmed long because it’s the first 5 minute period to close outside of the OBR.
Confirmation Failure
Confirmation is defined as having failed when, within the current session, price breaks out of the opposite side of the range after confirming direction. So if we have a confirmation short and price comes back into the OBR and breakes the high of the OBR, that is deemed as a confirmation failure and vice versa.
Example below:
As you can see in this image, it originally confirmed short (yellow circle) and then later failed (pink circle).
Standard Deviations
Standard Deviations (SD) are a critical statistical measure that quantifies the amount of variation or dispersion in a set of values. In the context of trading and the OB Range model, Standard Deviations help understand price changes and the likelihood of certain price movements.
Within the Opening Balance Range (OBR)
When it comes to price movements within the Opening Balance Range (OBR), we refer to these as retracements. Retracements are considered fractions of the range. To calculate these retracements, we utilize increments of 10% of the Standard Deviation.
By monitoring these 10% increments and comparing them to the data in the SnapShot app, traders can gain insights into the likelihood of price movement within the range. These insights can then be utilized to make informed decisions about entering or exiting trades, or adjusting stop levels.
In the example below, after confirming short, we have a clean retracement to the -0.3 SD. Which as you can see was clearly supported by the data distribution in the SnapShot app showing the ‘median’ retracement as being -0.3 SD.
Outside the Opening Balance Range (OBR)
Price movements outside of the OBR are known as extensions. Unlike retracements, extensions are considered multiples of the range. We calculate these using 50% increments of the Standard Deviation.
In the example below , after confirmation short and a retrace to -0.2 SD, we have a clear extension to the 1.0 SD, as supported by the ‘mode’ in the Extension distribution of the SnapShot app.
Understanding these extensions is crucial in anticipating potential price movements beyond the defined range, especially in more volatile market conditions.
In conclusion, Standard Deviations play a significant role in the OB Range model by helping traders understand and quantify market movement. By understanding how prices fluctuate within (retracements) and outside (extensions) the OBR, you can make more informed decisions and manage your risk more effectively.
Trade Entry
Choosing the optimal moment and method for entering a trade is pivotal to the success of any trading strategy. While this guide introduces various entry techniques, it’s essential to understand that the final choice rests with the trader. The entry methods discussed, such as the first touch of the retracement level, volume imbalances, and fair value gaps, serve as potential tools in a trader’s arsenal. However, it is the individual trader’s responsibility to select or design an entry technique that aligns with their unique perspective and strategy.”
First Touch of the Retracement Level: In many instances, a retracement to a significant level presents an excellent opportunity for trade entry. This is often referred to as the ‘First Touch’ method.
Volume Imbalance: Volume is a critical metric for traders, often acting as a confirmation indicator of the market’s strength. Volume imbalances are revisited often and can be key trade entry points. When buy orders significantly outnumber sell orders, or vice versa, it can create a compelling entry point, especially when it coincides with other factors such as the touch of a strong retracement level.
Fair Value Gaps and Order Blocks: ICT teachings and Smart Money Concepts in general make use of Fair Value Gaps and Order Blocks. These can be ideal entry methods in concert with the statistical analysis provided by SnapShot.
Preferred Entry Method: As all traders are different, having a personal preferred entry method can often be the most effective. Whether it’s using technical analysis patterns, using fundamental news events, or even intuition built from years of trading experience, trading the Opening Balance supports a wide array of personal strategies. The key is to be consistent and disciplined with your approach and we believe adding SnapShot to your analysis tool kit can be of great benefit to the trader.
Remember, while these trade entry methods can help guide your decision-making process, they are not foolproof. It’s essential to incorporate sound risk management principles into every trade and to understand that not all trades will be profitable. However, by consistently applying these techniques within the framework of the Opening Balance model, you can increase your odds of success.
Please remember, while statistical analysis and historical patterns can provide a useful guide, they do not guarantee future performance. Always use this information as part of a broader, comprehensive trading strategy, and do not rely on it exclusively for making your trading decisions.