OPENING RANGE

TRADING
USING THE OR TRADER METHOD TO
CONSISTENTLY & PROFITABLY TRADE THE ES MINI FUTURES

By Mark Church

Copyright 2010, TheORTrader.com Published by HopeXchange Publishing 26 Towne Centre Way #731 Hampton, VA 23666, USA All rights reserved. No part of this work may be reported or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher and author. Printed in the United States of America The charts used in this book were created by using www.TradeStation.com ISBN 0-9748699-1-0

The OR Trader.com

Disclaimers
The methods described in this book are for educational purposes only. Past results are not necessarily indicative of future results. The author and the publisher assume no responsibility for your trading results. Trading involves a high degree of risk. No recommendation is being made to buy any stock, commodity, option or other financial instrument. Consult your financial advisor before starting any investment system. U.S. Government Required Disclaimer - Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This eBook is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this eBook. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

The OR Trader.com

The OR Trader Method eBook

Introduction....5 1. Understanding the Opening Range.6 Introduction to the Pivot Range........7 2. Chart Set up for the OR Trader Method.......17 Timeframe and Symbol.........17 Pivot Range and Prior Day Close...18 The 9:30am Open20 The Opening Range...25 3. Trade Signals.................30 Buy Signals.................30 Sell Signals..............30 4. Trade Entry..33 Trade Entry Long34 Trade Entry Short35 5. Targets & Stops...37 6. Using the Pivot Range for Trade Entry.44 7. Trading Pointers..49 8. The OR Trader Test.51

The OR Trader.com

Introduction
I hear complaints all the time from traders who say, "Oh, I tried Opening Range trading and it didn't work for me." That's because the Opening Range is not enough! Trading based on a breakout of any Opening Range alone, no matter what timeframe you use, is a sure way of losing money. The most basic application of Opening Range trading is when a stock or commodity is trading above its Opening Range you should be long and when it is trading below its Opening Range you should be short. This principle and simple rule can keep you in sync with the markets sentiment or bias. The OR can provide a great road map for analyzing the sentiment of the market, identify trades with good risk/reward ratios and limit your risk; but you need more than just the Opening Range to be successful. Here at the OR Trader, in addition to the Opening Range we use a confirming close signal above the Opening Range as well as our Pivot Range from the prior day's trading to help us develop our bias going into the next day. This increases our odds of taking only the most profitable signals. Our philosophy is simple: Here at the OR Trader we like to say, "Opening Range + Pivot Range = Clarity. In this eBook, we will explore how I use the Opening Range along with the Pivot Range to profit in the market. This method is tailored for the S&P 500 E-mini Futures. All the signals, entries and stops are designed to work on this instrument only.

The OR Trader.com

1.

Understanding the Opening Range

Opening Range Trading is a method that calculates the price, above which, you want to be long and the price, below which, you want to be short. In this method you mark the high and low of a set time frame from the open. After defining the Opening Range, you buy a breakout to the upside of this range or sell short a breakdown of this range. You then place your stop at the opposite end of the range. If price breaks up, you place your stop at the bottom of the Opening Range; if price breaks down, your stop will be the top of the Opening Range. The first thing you need to do is define the time frame you will use for your Opening Range (5-minute, 15-minute, 30-minute, etc.) for each stock, bond, or commodity you have chosen to trade. Every financial vehicle has its own optimal Opening Range, so there are many opinions for the time frame to use. The OR Trader is a method to trade the S&P 500E-mini Futures. We have found with the ES Mini futures the best Opening Range is a 20-minute range. When I refer to the Opening Range, I want you to think 9:30 am Eastern Standard Time (EST) to 9:50 am Eastern Standard Time (EST). This is a very important time because 9:30am to 9:50am is the time when brokerage firms, banks, mutual funds, hedge funds, etc. are filling orders from the overnight and PreMarket. These trades are put on for various reasons. Orders from the day before are placed with brokers to buy at the open and others have orders to sell at the open. Orders are used to get out of a losing position or to take profit from a winning position. This order flow is very important. As an individual trader your goal is to follow the big money orders. The Opening Range is the footprint in the market made by these orders. We want to follow the path of the big money.

The OR Trader.com

Introduction to the Pivot Range

What is the Pivot Range?
The Pivot Range is a confluence area that identifies where the market is likely to find support or encounter resistance based on the prior days trading. The Pivot Range identifies the areas where buyers are likely to show up (which is support) and where sellers are likely to show up (which is resistance). The Pivot Range will also help you to see an area where a significant move could follow if the price can break through that area.

Pivot Range Overview

This section is an overview of the Pivot Range. We will get into how to use the Pivot Range as a buy or sell signal and where to place your stops in a later section. The key point here is to see how the Pivot Range can keep you on the right side of the market. The first thing we need to do is calculate the prior days Pivot Range.

See (Example 1) on the next page:

The OR Trader.com

High 1106.50 + Low 1096.25 + Close 1103.50 Total: 3306.25 /3 Daily Pivot: 1102.08

High 1106.50 + Low 1096.25 Total: 2202.75 /2 HL: 1101.38

Subtract Smallest Number from Largest Number

1102.08 -1101.38 .70 (factor)

Add factor (.70) to your Daily Pivot Number: 1102.08 + .70 = 1102.78 Then Subtract factor (.70) from your Daily Pivot Number: 1102.08 - .70 = 1101.38

1101.38 to 1102.78

Close 1103.50 Bullish Bias

Step 1. We take the prior days high, low and close and add them together and then divide our total by 3. This gives us our Daily Pivot. Step 2. We add the prior days high and low together and divide by 2. This gives us our HL number. Step 3. We take the larger of the 2 numbers (Daily Pivot and HL) and subtract the smaller number. This gives us our Factor number. Step 4. We add our Factor number to our Daily Pivot number and we also subtract it from or Daily Pivot number. The resulting 2 numbers become our Pivot Range.

Example 1
Now that we have our Pivot Range we need to see where price closed on the prior day. In this example we closed at 1103.50, which is above our Pivot Range. This gives us a Bullish Bias going into the next day, so we will expect to get long at some point after the open.

Lets go over a Bullish Pivot Range in (Example 2) on the next page:

The OR Trader.com

In this example we have a Bullish Bias going into this day because we closed above our Pivot Range. Once our Pivot Range is calculated, we draw horizontal lines on our charts so we have a visual reference point. We will go over how to place these lines on your chart in a later section. When the market opens, we will look for the best opportunity to go long, using either the Pivot Range as our trigger or the Opening Range as our trigger. The price action when the market opens will determine what action we will take. The key point to note is that the Pivot Range should give support at this price zone.

1103.50 1102.78 1101.38

Example 2

The OR Trader.com

I like to think of the Pivot Range as a thick piece of foam. As price moves down and into the Pivot Range it should give, but it shouldnt break. It should support this price range and act like a spring, bouncing price back out of this range. Buyers are showing up.

1103.50

1102.78
Think of the range as foam that gives but should not break

1101.38

Example 3

Lets go over a Bearish Pivot Range in Example 4 on the next page:

The OR Trader.com

10

In this example, we have a Bearish Bias going into the day because we closed below our Pivot Range. If we close below our Pivot Range then our bias would be Bearish for the day. We would look to get short at the best opportunity using either the Pivot Range as our trigger or the Opening Range as our trigger. The price action when the market opens will determine what action we will take. The key point to note here is that the Pivot Range should act as resistance at this price zone.

1101.38 1099.13 1098.00

Example 4

The OR Trader.com

11

Again, think of the Pivot Range as a thick piece of foam. As price moves up into the Pivot Range it can give, but it shouldnt break. It should act as resistance at this price range and spring price back out of the range. Sellers are showing up.

1101.38
Think of the range as foam that gives but should not break

1099.13

1098.00

Example 5

The OR Trader.com

12

What if we are wrong and the Pivot Range does not hold support? We would exit any trade we are in, realizing that support has been broken.

1103.50

1102.78

1101.38

Example 6

The OR Trader.com

13

The same would be said if resistance is overcome. We would exit our trade and realize that the market conditions have changed.

1101.38

1099.13

1098.00

Example 7

The OR Trader.com

14

Opening Under a Supportive Pivot Range

There are only two things that can change our Bullish Bias for the day. One is gapping under the supportive Pivot Range at the open. The other would be closing a 5-minute bar under our supportive Pivot Range after the market is open. If we have a supportive Pivot Range and we are opening below it then we must change our bias from Bullish to Bearish. The support has failed. The old support now becomes new resistance. We would now be looking for an opportunity to get short using the Pivot Range as resistance. Important: We must open below the Pivot Range in order to change our bias! One tick matters!

Example 8

The OR Trader.com

15

Opening Above a Resistant Pivot Range

Again, there are only two things that can change our Bearish Bias for the day. One is gapping above the resistant Pivot Range at the open. The other would be closing a 5-minute bar above our resistant Pivot Range after the market is open. If we have a resistant Pivot Range and we are opening above it then we must change our bias from Bearish to Bullish. The resistance has been overcome. The old resistance now becomes new support. We would now be looking for an opportunity to get long using the Pivot Range as support. Important: We must open above the Pivot Range in order to change our bias! One tick matters!

Example 9

The OR Trader.com

16

2.

Chart Set-Up and Guidelines

Now that we understand that our Opening Range is the first 20 minutes of the trading day, and we know how to calculate our Pivot Range and how it affects price the next day; it is time to put it all together into an organized way of trading. The first thing we need to do is set up our charts for the OR Trader Method. You should note that the OR Trader Method is designed to be used on the S&P 500 E-mini Futures only. In this section we will show you: How to set up your charts. What timeframe to use. How to draw Opening Range and Pivot Range lines on your charts.

Depending on your charting software, the E-mini S&P can be found in your instrument Data list and can be displayed in different formats. TradeStation displays the S&P 500 E-mini as: ESH10 - which represents the March 2010 E-mini S&P contract ESM10 - which represents the June 2010 E-mini S&P contract ESU10 - which represents the September 2010 E-mini S&P contract ESZ10 - which represents the December 2010 E-mini S&P contract The OR Trader Method is to be used with a 5-minute chart. The timeframe you should set up on your charts is a 5-minute chart. The settings should be 24 hours or Globex mixed with day session or continuous data. The charts should be set up as 24-hour continuous data for the contract month you are trading in. If you live in a time zone other than Eastern Standard Time, then you must apply the time difference to your charts.

Setting Up Your 5-Minute Chart

Each evening after the 4:15pm EST close, I calculate the Pivot Range for the next day. Next, I (manually) place horizontal lines on my chart at the price values of the Pivot Range (I use purple hash lines for my Pivot Range, but you can choose your own color and style). Then I place a horizontal line on the price value of the closing price (I use blue for my closing price- again you can customize your chart as you see fit).

Take a look at Example 10 on the next page:

The OR Trader.com

17

Drawing the Pivot Range and Prior Day Close Lines

Use your trading software to draw horizontal lines at the price values of your calculated Pivot Range and Prior Day closing price. I use purple hash lines for my Pivot Range and a blue solid line for the Prior Days close.

Bearish Bias for Next Day

Example 10

The OR Trader.com

18

Bullish Bias for Next Day

Example 11

The OR Trader.com

19

The 9:30 Open

We want to begin calculating the Opening Range from the 9:30am opening price. In order to calculate the Opening Range properly you need to know which bar to use to start your calculation. We are using a 5-minute chart. All minute bars have an opening price and a closing price. You will place a vertical line on your chart on the last bar of the Pre-Market. This is the bar that closes at 9:30am. Find this 9:25am - 9:30am bar on your 5-minute chart and place a vertical line on this bar. The bar opens at 9:25am EST and closes at 9:30am EST. This is very important to understand because the opening bar for our trading method begins at 9:30am EST and has an ending time (or closes) at 9:35am EST. On TradeStation, when you place the crosshairs over the bar it shows 9:35am, but the bar actually opens at 9:30 and closes at 9:35 (on a 5-minute chart). The timeframe showing is a close price, not an open price.

The following examples (Examples 12, 13) illustrate proper chart setup:

The OR Trader.com

20

Example 12

The OR Trader.com

21

Example 13

The OR Trader.com

22

The Open Price

Once the market is open, the next step is to place a horizontal line at the price of the open (I use a green line for my open price). We place a horizontal line there because the open price is a key area for the trading day. The open price acts like a magnet that draws price to itself. Knowing this will help us as the trading day goes on. Also, it is a nice visual reference point.

See Examples 14 and 15 below:

Example 14

The OR Trader.com

23

Example 15

The OR Trader.com

24

The Opening Range

After the market opens we will wait until four 5-minute bars post. This means we are using a total of four 5-minute bars for our Opening Range: The first bar is 9:30am open, closing at 9:35am. The second bar is 9:35am open, closing at 9:40am. The third bar is 9:40am open, closing at 9:45am. The final bar opens at 9:45am and closes at 9:50am. We are using these four 5-minute bars as our Opening Range. This period of price discovery is a battle between Bulls and Bears fighting for control of the market. The Opening Range defines the critical price inflection points for the day. It contains all the information we need to determine how price will react in the near future. We now place horizontal lines on the Highest High and Lowest Low of these four bars.

See some examples of the four 5-minute bars beginning on the next page (in Examples 16, 17 and 18):

The OR Trader.com

25

Example 16

The OR Trader.com

26

Example 17

The OR Trader.com

27

Example 18
Now you should understand how to plot these four bars. We are isolating these bars to be used as our Opening Range. Remember, only the Highest High and Lowest Low of these four bars will be outlined. This is the reference point we need to calculate the entry to our trades. Now that you know how to set up your chart, lets take a look at a chart with all the lines in their proper place.

See Example 19 on next page:

The OR Trader.com

28

Prior Day Close

Example 19

The OR Trader.com

29

3.

Trade Signals
Now that our charts are set up, the next step is to wait for the market to give us a signal to trade. This comes when a 5-minute bar closes either above or below our Opening Range.

For a Buy Signal:

When a 5-minute bar closes above the Opening Range we have a buy signal. If price penetrates above the Opening Range, but closes back inside the Opening Range, we have no signal. Important: This is only a signal, not an entry to a trade. We are not going long based on this close above the Opening Range alone. We will go over order entry in the next section.

A Short Signal is Exactly the Opposite:

When a 5-minute bar closes below (the low) of the Opening Range then we have a sell signal. If price penetrates below the Opening Range, but closes back up into the Opening Range, we have no signal. Important: This is only a signal, not an entry to a trade. We are not going short based on this close below the Opening Range alone. We will go over order entry in the next section. *We do not take signals between 11:00am EST 1:00pm EST. This is considered a low volume timeframe and is prone to bad signals. We have found that the best signals happen before 11:00am.

See examples of 5-minute bar closings (Examples 20 and 21) beginning on the next page:

The OR Trader.com

30

Example 20
Remember, this is NOT a signal to take the trade. This is only a signal which could lead to entering a long trade. Price closed above the Highest High of our Opening Range. We have a signal to go long, but not a trigger to enter the trade. That is yet to come.

The OR Trader.com

31

Example 21
Remember, this is NOT a signal to take the trade. This is only a signal which could lead to entering a short trade. Price closed below the Lowest Low of our Opening Range. We have a signal to go short, but no trigger to enter the trade. That is yet to come.

The OR Trader.com

32

4.

The Entry

Once our signal has occurred, we know the direction in which we want to Trade. If it is a buy signal, we will go long, and if it is a sell signal, we will go short. The question is where to enter, and at what price? If we have a long signal (when price penetrates the Highest High of the Opening Range, stays there and closes above it), then we will place a limit order to go long at the price of the top of the Opening Range. This is the entry point. If we have a short signal (when price penetrates the Lowest Low of the Opening Range, stays there and closes below it), then we will place a limit order to go short at the price of the bottom of the Opening Range. This is the entry point. The horizontal lines you placed on your chart provide not only a visual reference, but they also act as a buy and sell point. Lets review: After price closes above our Highest High or Lowest Low of our Opening Range we immediately place a limit order to enter the market at that Highest High / Lowest Low (horizontal lines) as our entry price for going long or short once our signal is complete. In order to be filled, price needs to retrace to that level after closing above/below it. It does not matter where the signal occurs. Price must retrace to the Highest High or Lowest Low after the signal; that is your long or short entry or trigger.

Lets look at a long entry in Example 22 on the next page:

The OR Trader.com

33

Once a 5 minute bar closes above the Opening Range we place our limit order at the price of the top of the Opening Range to go long (in this case 1079.50)

Stop would be 1 tick below the Opening Range

Example 22
We are entering long at the white line (Highest High of the Opening Range) after price has closed above the Opening Range and waiting for price to retrace back to it. Important: If price has not retraced within 15 minutes of closing above the Opening Range then we will cancel the order.

Now lets look at a short entry in Example 23 on the next page:

The OR Trader.com

34

Stop would be 1 tick above the Opening Range

Once a 5 minute bar closes below the Opening Range we place our limit order at the price of the bottom of the Opening Range to go short (In this example 1073.25)

Sell Signal
(Close below the Opening Range)

Example 23
We are entering short at the white line (Lowest Low of the Opening Range) after price has closed below the Opening Range and waiting for price to retrace back to it. Important: If price has not retraced within 15 minutes of closing above the Opening Range then we will cancel the order.

The OR Trader.com

35

Keep in mind that sometimes price does not retrace as in Example 24 below:
This is ok. We didnt miss anything because we didnt lose anything. Price may or may not come back. This occurs once in a while, so when it does, do not force a trade. Tomorrow is another day. If it does come back down after this happens, you probably dont want it.

Notice price closed above the Opening Range signaling a buy, but never retraced back to the top of the Opening Range

Example 24

The OR Trader.com

36

5.

Target & Stops

In the beginning of this book we told you that the Opening Range is not enough. This is because trading based on a breakout of any Opening Range alone, no matter what timeframe you use, is a sure way of losing money. A key point to understand about the OR Trader Method, and how it is different, is the concept of acceptance or rejection of the Opening Range breakout. Once price has broken out of the Opening Range there is a period of adjustment among traders. This time of adjustment is used to see if the new prices are going to be accepted or rejected. In the S&P E-mini we have calculated that this point of acceptance or rejection is the area 2 points above or below the Opening Range.

See examples (Example 25 and 26) below:

Example 25

The OR Trader.com

37

Example 26
Notice that the initial breakout of the Opening Range went to 2 points above the Opening Range. Also notice the overlapping bars around the area of the 2 points. This is the adjustment time where traders are fighting it out to see if the breakout will be accepted. Another point to note is after the breakout has been accepted and price moves higherthere is a pullback that respects this 2 poi nt area again.

Created with TradeStation

Example 26
Notice that the initial breakout of the Opening Range went to 2 points above the Opening Range. Also notice the overlapping bars around the area of the 2 points. This is the adjustment time where traders are fighting it out to see if the breakout will be accepted. Another point to note is after the breakout has been accepted and price moves higher, there is a pullback that respects this 2-point area again.

The OR Trader.com

38

The OR Trader Method uses this to our advantage by making this area our first target. Knowing that price will go to at least 2 points above or below our Opening Range before getting rejected gives us a great place to take profits on a part of our position. This ensures a lower risk trade. In the OR Trader Method we enter the trade with a full position and we divide our targets in halves. Our first target is always 2 points because of the reasons explained on the previous page about the area of acceptance or rejection. Our target on the second half of our position is normally 4 points. If you are trading from a smaller account and can only afford to trade one contract, you will have a decision to make about trade management- whether to go only for the first target or to hold until the 2nd target. Our stop (on the whole position) at entry is 1 tick above or below the Opening Rangedepending on which direction we are trading. After our first target is hit at 2 points, we then move our stop on the second half of our position to the close of a 5-minute bar back into the Opening Range. This way, if price gets rejected at the 2-point area, at least we exited half of our position to ensure a break-even trade or, at worst, a small loss. Lets look at the math: Lets say our normal full position size trade is 4 contracts. If we exit half of our position at 2 points we would pocket $200 (2 contracts x 2 points= $200 profit). If price reverses and closes a 5-minute bar back into the Opening Range, lets say by 2 ticks, we would close our trade and lose 2 ticks on the 2nd half of our position. (2 contracts x 2 ticks = - $50). So the results of the trade would look like this: First half of position +$200 2nd half of position - $50 Net trade +$150 commissions As you can see, the beauty of this method is even if the breakout is rejected we can have a small winner or, at worst, a small loser depending on how far price closes back into the Opening Range. The key is to exit half of our position at the point of acceptance or rejection (2 points).

Lets look at a chart in Example 27 on the next page:

The OR Trader.com

39

Created with TradeStation

Example 27
The worst-case scenario happens if we are unable to get out of the first half of our position at 2 points and price reverses to stop us out at the other end of the Opening Range (with a full position loss). This scenario is highly unlikely because of the adjustment period of the breakout; however it does happen on occasion.

The OR Trader.com

40

Extended Targets
Our next target is 4 points in most cases. I say most cases because there are times when you can go for more. The OR Trader Method is designed to catch a trending day. A trending day occurs when price closes above or below the Opening Range and never closes a bar back into the Opening Range. It continues to trade higher or lower (depending on the trade) until the end of the day. On the better set-ups, you might consider holding a portion of your trade to catch this trend day. We like to set-up our trades with bracket orders where the targets and stop are set once we get filled. We have found that the market likes to move in predictable increments. The best set-up combinations are: 1st target2 points 2nd target 4 points (These trades would be done in halves) 1st target 2 points 2nd target 5 points (These trades would be done in halves) 1st target 2 points 2nd target 4 points final target 8 points (These trades would be done in thirds) 1st target 2 points 2nd target 5 points final target 8 points (These trades would be done in thirds)

Stops
A key point to note when we place our order is that we always have a hard stop of 1 tick above or below the Opening Range (depending on the direction we are trading). Once our first target is hit we move our stop to the close of a 5-minute bar back into the Opening Range. If you think about this, you cannot move your stop there physically because you do not know where that will be until it happens; so we must move our stop there in our minds. Our hard stop is still 1 tick above or below the Opening Range. You always want a hard stop in place at all times for safetys sake when waiting for the close of a 5-minute bar back into the Opening Range. Once price closes back into the Opening Range, we exit immediately with a market order canceling any other orders that might be left on our dome. When going for extended targets, stop placement is a matter or personal risk tolerance. Once the first target is hit we move our stop to the close of a 5-minute bar back into the Opening Range.

The OR Trader.com

41

When your 2nd target is 4 points, this stop doesnt change. However, when you are going for 5 and 8 points, you can keep your stop at the close of a 5-minute bar back into the Opening Range or you can trail your stop by using swing pivots. This decision is up to the individual. Those who do not want to let profits slip away might prefer a trailing stop while others may be willing to give the trade more room by keeping their stop at a close back into the Opening Range.

Lets look at some examples (Example 28 and 29) below:

Once 1 target is hit move stop to a close of a 5 minute bar back into the Opening Range

st

Created with TradeStation

Example 28

The OR Trader.com

42

Once 1 target is hit move stop to a close of a 5 minute bar back into the Opening Range

st

Created with TradeStation

Example 29

The OR Trader.com

43

6.

Using the Pivot Range for Trade Entry

There are times when we can use the Pivot Range to enter a trade early, before the Opening Range has completed. Lets say we have a Bullish Pivot Range (meaning we closed above this Pivot Range) and the next day we are opening inside this Bullish Pivot Range. We can go long at the open knowing that this Pivot Range should be support. This gives us a lower risk trade entry because we now can use the Pivot Range as our stop. We can also have larger targets if the Opening Range gives us a buy signal later in the morning. The same would be said if we had a Bearish Pivot Range and we were opening inside this Bearish Range. We could go short at the open using this Pivot Range as our stop to help lower our risk. If we enter a trade using the Pivot Range we will use the Pivot Range as our stop just as we use the Opening Range. One point to make about using the Pivot Range as a stop- I use the close of a 5-minute bar above or below the Pivot Range as a stop rather than using 1 tick above or below like we do on the Opening Range. This is because the Pivot Range is based on the prior days price action and is not as firm of a predictor as the current days Opening Range. Always have a hard stop in place when using this technique.

Lets take a look at some examples (Example 30 and 31) on the next page:

The OR Trader.com

44

Buy at Open with Bullish Pivot Range

Example 30

The OR Trader.com

45

Sell at Open with Bearish Pivot Range

Example 31

The OR Trader.com

46

Using the Pivot Range for Better Signals

We can also use the Pivot Range as a filter for taking only the best Opening Range signals. Our Pivot Range acts as our daily bias, so if we have a Bullish Bias going into the day and we are looking to get long, but we get a sell signal from our Opening Range, we might not want to take the sell signal. Taking the signal would mean that price would have to trade into our supportive Pivot Range, preventing us from hitting our targets.

See Example 32 below:

Example 32

The OR Trader.com

47

The same could be said about a Bearish Bias with a buy signal. Our Pivot Range acts as our daily bias, so if we have a Bearish Bias going into the day and we are looking to get short, but we get a buy signal from our Opening Range, we might not want to take the buy signal.

See Example 33 below:

Example 33
One point to make about these situations is the hierarchy of the Pivot Range and the Opening Range. The Opening Range always overrides the Pivot Range. So even though these Opening Range signals might not be the best signals to take, you must be aware that the market is at odds with the prior days price action.

The OR Trader.com

48

7.

Trading Pointers
1. Handling Losses
Trading is a game of probabilities. That may sound strange because everyone believes if Im right, Ive made a good trade. Face it: you are going to get stopped out; it is inevitable. Your job is to make excellent risk-reward decisions, not to make money. Your must find patterns that offer you the best probabilities. The money will come. How you manage the trade is what will constitute your success in using this method. If you do get stopped out, here are some guidelines: Dont panic. Sometimes the market just pulls back too far. Thats reality. Sometimes price and volatility are just too much and your stop is hit. Take the next signal and entry. Trade the method regardless of what you may think or feel. Trust in the probabilities of this method, you will win more than you lose. To recover from a loss, take the next trade regardless.

2. Taking Profits
Discretion is in the exit not the entry. Here are three questions that must be answered when developing an exit strategy: "How long am I planning on being in this trade?", "How much risk am I willing to take?" and finally, "Where do I want to get out?" Money management is one of the most important aspects of trading. Many traders enter a trade without any kind of exit strategy and are therefore more likely to take premature profits or, worse, have losses. If you are trading from a smaller account and can only trade one contract then go for the first target and be done. Grow your account this way until you can trade 2 contracts and then 3 and so on. There is no need to trade large contract size with this method. You can make a great living with this method with as few as 4 contracts.

3. Tricks of the Trade

Narrow Pivot Range Day Whenever the Pivot Range is 1.25 points or less, we call this a Narrow Range Pivot Range Day. The narrow range indicates a large price movement for the next day. This does not

The OR Trader.com

49

mean price will move a large amount in one direction, although it could. It means price will be volatile. You can think of the Narrow Range Pivot Range as a volatility indicator. You want to be careful to be on the right side of the market on these days. Use the Open Price as Entry and Stop Whenever the open price is in the top or bottom of the Opening Range you can use it as an entry instead of the top or bottom of the Opening Range. This will give you a better entry with less risk. The only drawback to using this method of entry is that price might not come to the open price and you will end up missing the trade, or worse, chasing it. The logic behind this entry is that the open price acts like a magnet and draws price to itself. If the open price is near the top or bottom of the Opening Range price will not just pull back to the top or bottom of the Opening Range, but will likely pull back to the open. You can also apply the same logic to use the open price as a stop. Lets say you entered long at the top of the Opening Range and have hit your first target of 2 points. Your stop now should be a close of the 5-minute bar back into the Opening Range. However, if the open price is in the top of the Opening Range you might want to give the trade a little more room and use a close below the open price as your stop instead. If the open price acts like a magnet, drawing price to itself, then price might want to come back to the open price to test that area. Waiting for a close below the open price might cause you to give back more to the market. On the other hand, it might keep you from getting stopped out with a close back into the Opening Range. Pre-Market Price Action When you have a Pivot Range that is either Bullish or Bearish and price trades above or below this Pivot Range in the Pre-Market, but opens inside the Pivot Range, beware of the Pivot Ranges validity. When this happens the safest thing to do is wait on the Opening Range to complete before taking a trade. Final Thoughts Before you begin trading this method (or any method) with real money, practice trading it on a simulator first. Familiarize yourself with your trading software and learn to use bracket orders. Practice entering and exiting trades. Learn how to use trailing stops. You must learn how to make money on paper before you can make it for real. I hope you have found this course to be both educational and a valuable tool to trade profitably. Please take time to test your knowledge with our OR Trader Test on the following pages. We invite all questions, comments and general feedback too. Good trading!

The OR Trader.com

50

The OR Trader Method Test

This test will help you think through different trading situations and understand the proper action to take at the appropriate time. Traders have told me how much this simple test has helped them to understand and utilize the OR Trader Method.

1. What defines the Opening Range? A. High and low of the first hour of the day B. First day of the month C. High and low of the first 20 minutes of the trading day D. High and low of the last hour of the previous day

OR

Answer is on the next page.

The OR Trader.com

51

Answer to Question 1: C - The high and low of the first 20 minutes of the trading day defines our Opening Range.

2. What is the purpose of the Pivot Range? A. To identify a key area where the market is likely to find support or meet resistance B. To give us our bias for the day C. To act as a guide for our trading strategy D. All of the above

Pivot Range

The OR Trader.com

52

Answer to Question 2: D - All of the above. The main purpose of the Pivot Range is to give us our daily bias, along with showing us a key area where support and resistance are, plus act as a guide to our trading strategy.

3. Given the scenario below what is your bias for the day? A. Bullish B. Bearish C. Neutral

Pivot Range

Prior Day Close

The OR Trader.com

53

Answer to Question 3: B - Bearish because we closed below our Pivot Range.

4. Given the scenario below what is your bias for the day? A. Bullish B. Bearish C. Neutral

Prior Day Close

Pivot Range

The OR Trader.com

54

Answer to Question 4: A - Bullish because we closed above our Pivot Range.

5. What does this Pivot Range say about the next day? A. Consolidation day B. Large price movement day C. Neutral

Pivot Range Prior Day Close

The OR Trader.com

55

Answer to Question 5: B - Large price movement day. Whenever you see a narrow Pivot Range (1.25 or less) this points to a large price movement the next day.

6. Given the scenario below what is your bias for the day? A. Bullish B. Bearish C. Neutral

Prior Day Close

Pivot Range

Open

The OR Trader.com

56

Answer to Question 6: B Bearish. Whenever price opens below your supportive Pivot Range at the open then you must change your bias.

7. What action should you take at the open? A. Buy B. Sell C. Nothing

Pivot Range

Open Prior Day Close

9:30AM

The OR Trader.com

57

Answer to Question 7: B Sell. Since the close of the prior day was below the Pivot Range, the Pivot Range should be resistance. You can sell anywhere inside a resistant Pivot Range.

8. Since the right answer to #7 was sell, where would your stop go? A. Below the open B. Below the prior days close C. Above the Pivot Range D. Above the open

Pivot Range

Open Prior Day Close

9:30AM

The OR Trader.com

58

Answer to Question 8: C - Above the Pivot Range. Either 1 tick above or a close of a 5-minute bar above, whichever you are more comfortable with given your risk tolerance

9. What action should you take at the open? A. Buy B. Sell C. Wait for 20-minute Opening Range to complete D. Wait for price to trade into the Pivot Range and then buy

Open
Prior Day Close

Pivot Range

The OR Trader.com

59

Answer to Question 9: either C or D - Waiting for price to trade into the Pivot Range or waiting for the OR to complete is always the safest thing to do.

10. What action should you take at the open? A. Buy B. Sell C. Wait for 20-minute Opening Range to complete D. Wait for price to trade out of the Pivot Range and then buy

Prior Day Close

Pivot Range

Open

The OR Trader.com

60

Answer to Question 10: A Buy. Since the close of the prior day was above the Pivot Range the Pivot Range should be support. You can buy anywhere inside a supportive Pivot Range.

11. Since the answer to #10 was buy. Where would you place your stop? A. B. C. D. Below the open Below the prior days close Below the Pivot Range Above the open

Prior Day Close

Pivot Range Open

The OR Trader.com

61

Answer to Question 11: C - Below the Pivot Range. Either 1 tick below or a close of a 5-minute bar below, whichever you are more comfortable with given your risk tolerance.

12. What should your first target be once you have been filled from the OR? A. 3 points B. 5 points C. 1 point D. 2 points

First Target?

Order Filled

OR

The OR Trader.com

62

Answer to Question 12: D - Because 2 points above the OR in the ES futures is a key point of price acceptance or price rejection. We want to get out of at least a portion of our position here to insure a break-even trade should price roll over and sell off. The same is true for taking a sell signal.

13. What are the best targets for a trending day? A. 1 3 8 Points B. 2 4 6 Points C. 2 5 8 Points D. 3 6 9 Points

3rd Target? 2nd Target?

Entry

1st Target?

OR

The OR Trader.com

63

Answer to Question 13: C - The best targets for a trending day are usually 2-5-8.

14. What does this price action suggest? A. Add to your position B. Move stop C. Buy with a limit order at the top of the OR D. Chance for a trend day greatly reduced

First Target Hit

OR

The OR Trader.com

64

Answer to Question 14: D - Once price has traded 2 points or more above the OR it should not close a 5-minute bar back into the OR; this is usually a sign that we are not going to have a trend day. Of course there are always exceptions to the rule, but odds favor exiting your trade.

15. If you missed this buy at the open what action should you take next? A. Buy right away B. Sell right away C. Buy with a limit order at the top of the OR D. Nothing

Prior Day Close Open

Pivot Range

OR

The OR Trader.com

65

Answer to Question 15: C - Once price has closed a 5-minute bar above the Opening Range and the Pivot Range then place your limit order to buy at the price of the top of the Opening Range and wait to be filled. If not filled in 15 minutes, cancel the order.

16. What action should you take next? A. Buy right away B. Sell right away C. Sell with a limit order at the bottom of the OR D. Nothing

Prior Day Close

OR
Pivot Range

Open

The OR Trader.com

66

Answer to Question 16: D Nothing. We closed a 5-minute bar below the OR; however our supportive Pivot Range is still intact.

17. What action should you take next? A. Leave stop in place B. Move stop to a close of a bar back into the OR C. Move stop to open price D. Nothing

2 Pt. Target

OR

The OR Trader.com

67

Answer to Question 17: B - After hitting the first target move your stop to a close of a 5-minute bar back into the OR. This insures that you will have a break-even trade at worst. More aggressive traders can use the open for your stop; however a break-even scenario is better.

18. What action should you take next? A. Leave stop in place B. Move stop to a close of a bar back into the OR C. Exit trade D. Nothing

2nd Target

2 Pt. Target

OR

3 PM

The OR Trader.com

68

Answer to Question 18: C - At 3pm close out the trade. More aggressive traders can hold until the close, but a hard stop of entry should be used to insure a profitable trade. The last hour does not conform to the OR theory.

19. What action should you take next? A. Buy right away B. Sell right away C. Sell with a limit order at the bottom of the OR D. Nothing

Pivot Range

O R
Prior Day Close

The OR Trader.com

69

Answer to Question 19: D Nothing. We closed a 5-minute bar above the OR however our resistant Pivot Range is still intact.

20. After taking this test what action should you take next? A. B. C. D. Spend all the money you make on your wife or husband Send all the money you make to The OR Trader Blame The OR Trader for all of your losses Practice on a simulator to get good at recognizing and acting on good signals until you can make money on paper

Answer to Question 20: D - Practice makes perfector should I say perfect practice makes perfect!

The OR Trader.com

70

Disclaimer
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. GOVERNMENT REGULATIONS REQUIRE DISCLOSURE OF THE FACT THAT WHILE THESE METHODS MAY HAVE WORKED IN THE PAST, PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. WHILE THERE IS A POTENTIAL FOR PROFITS THERE IS ALSO A RISK OF LOSS. A LOSS INCURRED IN CONNECTION WITH TRADING FUTURES CONTRACTS CAN BE SIGNIFICANT. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION SINCE ALL SPECULATIVE TRADING IS INHERENTLY RISKY AND SHOULD ONLY BE UNDERTAKEN BY INDIVIDUALS WITH ADEQUATE RISK CAPITAL. ANY ADVISORY OR SIGNAL GENERATED BY THE OR TRADER IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY. ANY TRADES PLACED UPON RELIANCE ON WWW.THEORTRADER.COM SYSTEMS ARE TAKEN AT YOUR OWN RISK FOR YOUR OWN ACCOUNT. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. WHILE THERE IS GREAT POTENTIAL FOR REWARD TRADING COMMODITY FUTURES, THERE IS ALSO SUBSTANTIAL RISK OF LOSS IN ALL TRADING. YOU MUST DECIDE YOUR OWN SUITABILITY TO TRADE OR NOT. FUTURES RESULTS CAN NEVER BE GUARANTEED. THIS IS NOT AN OFFER TO BUY OR SELL FUTURES OR COMMODITY INTERESTS.

The OR Trader.com

71