Range Set-ups to Add to Your Arsenal

07/30/2012 10:17 am EST

Focus: STRATEGIES

Scott Andrews

CEO & Co-Founder, InvestiQuant

Veteran trader Scott Andrews describes some reliable opening range set-ups that even gap, trend, or breakout traders may want to add in order to broaden their skill set.

We’re talking about trading within a range today with Scott Andrews.  Scott, you’re known for trading gaps, but now you’ve expanded your approach to include ranges.  Tell us what that’s about. 

Well, I’ve been trading gaps a long time, and only gaps.  I’ve been jokingly called a one-trick pony.  I’m okay with that, because focus is a good thing when it comes to trading.  But after quite a few years I’ve added actually two set-ups, but both are opening-range related.  The concept being that I’m very picky, and I trade gaps only when historical probabilities align themselves, which is generally only about 100 days a year.  The other 150 trading days of the year, I would sit there and watch the opening gap, and often it would fill and then bounce off of the gap, and fill and continue higher.  Often, it would not fill the gap. That’s why I didn’t trade it, but it would start trending. I wanted to find a way to leverage my gap research, when I saw that it was not a good gap fade, to actually trade in the opposite direction.  So, I’m trading opening ranges, breakouts, and fades.

Let’s talk a little bit then about how this actually works, and talk about how it works in the context of market conditions, for example.

Sure.  So, the opening range can be defined as any time period.  Some people trade two-minute opening ranges.  Some people trade two-hour opening ranges.  I trade the first hour, and a fifteen minute range.  So, if you just literally look at a price chart and draw a line across the highs of the first hour’s trading range, and draw a line across the lows of the first hour’s trading range, those two lines create four set-ups.  I can go long on a break with the first hour’s high if I believe it’s going to be a trend day to the upside.  I can go short on a break of the low if I believe it’s going to be a trend to the downside.  Or, sometimes I’ll actually fade the high, and what that means is if price in the first hour traded up and then sold off a little bit—if it retests that high—sometimes I’ll go short again if I believe that’s a level that historically has held.  And vice versa, I’ll fade the lows with the exact same concept—buying a test of the lows thinking that we may continue higher after that.

Now, does the general market’s trade on any given day affect how you might view your decision? 

Sure.  So, like you said, I’m the gap guy.  That’s what I’m really good at and if I determine based on a stroke of probabilities that it’s not a good probability of a gap fill, then in my mind I’m thinking—let’s say the gap is up—if it’s not a good chance of going down back to yesterday’s closing price, that means by default that there may be a good chance of it going the other way.  So, what I’m looking at is did I have good probabilities for a gap fill or not?  If the answer is no, then I’m thinking long on the opening range breakout, and then I wait for the first-hour range to complete my database.  I look at every set-up three different ways.  So I’m looking at triggers that are based upon where the breakout is occurring within a three-day price pattern.  So, I look at a three-day price pattern.

Secondly, I look at what zone, and what I mean by zone is did we open above the prior day’s high, below the prior day’s low, or somewhere in between. We have five different zones—actually ten zones—five zones with two different day conditions, either being up or down. 

And then thirdly, and I know this is a lot, but that’s what it takes to really identify the best set-ups.  Thirdly, I’m looking at the price action for the first hour.  Was that first hour, did it open near its’ highs and close near it’s highs?  Did it open near its’ lows and trend upward?  Did it open near it’s highs and trend down?  There are many different permutations for the price pattern in the first hour, and if the average, historically, of those three different set-ups that are employed show it’s a good set-up, then I’m taking that set-up whether it’s a high breakout or low breakout, but the gap probabilities really set me up. 

Well Scott, thank you so much for sharing this with us today.

You’re welcome.

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