Trends from the start of the trading day – basic features
This lesson will cover the following
- What are the chances that a trend from the start may occur?
- What are the basic features of these trends?
What are the chances that a trend from the start may occur?
One of the most prominent types of trends is a trend, which begins from the start of a trading day (respectively the trading day can be called a “trend from the start day”). However, the probability that such trends may occur is seen by experts to be about twenty percent. Or we can say that, if a trader intends to go long above the first bar during the day or to go short below that bar in anticipation that it may mark the beginning of a strong trend, the chances of a successful trade seem to be low. On the other hand, the chances of a reversal during the first hour of the day are far higher.
Some experts believe that the chance of the first bar being a daily high or a daily low, when the day opens with a huge gap, is about fifty percent, in case this first bar is a bull trend or a bear trend bar with a large body.
The probability that the daily high or the daily low may form within the first five bars is considered to be also about 50 percent. One of these extremes appears within the opening range of the day, which may last two to three hours, in about 90 percent of the cases.
Any trend day may produce a trend from the start. During a day, known as a trend from the start day, prices form one extreme within the first bar or the first several bars, after which they trend during the entire trading day and finally close at or in proximity to the opposite extreme. As soon as a bar exceeds the high price of the first bar, the trading day becomes a “trend from the start bull trend day”, at least for the present moment. In case it moves below the low price of the first bar, the trading day becomes a “trend from the start bear trend day”.
During most trading days, this move is not supported by further price action and a reversal usually occurs. On the other hand, if the breakout from the previous bar turns out to be a far larger spike, there is a significant possibility that the trading day will be a strong trend from the start day. Therefore, market players should trade it as a strong trend day.
At times a trading range may be formed during the first thirty minutes of the trading day, after which it is usually breached. However, the open of the day usually remains near one of the extremes of the day, respectively the daily low in case of an uptrend and the daily high in case of a downtrend. Such trend days usually open with a huge gap, after which prices continue to trend in either direction. For example, a huge gap to the downside may lead either to a “bull trend from the start day” or to a “bear trend from the start day”. Such a setup tends to be more reliable, if it forms at a key level, a trend channel line for example (wedge reversal formation).
A trend from the start of the trading day may demonstrate such a strength, that there could even be price action in its direction during the first one or two hours of the next trading day. In such a case a trader would better wait and enter in the direction of the trend on pullbacks after the start of the next trading day. Pullbacks may often appear to be sufficiently deep in order to leave a trader wondering whether a trend reversal is not occurring right now. Actually, these pullbacks are two-legged retracements, if viewed on higher time frame charts. But, as we said earlier, it is more convenient for a trader to examine only one chart (we prefer the 5-minute and 10-minute charts). Very often at the end of every pullback a setup appears (if viewed on the 5-minute chart).
As the trend from the start of the day develops, it is also possible pullbacks, which occur, to be quite short during the entire day. In this case we have the so called “small pullback trend day”. It is regarded as the strongest type of trend day, which according to experts, is present once or twice per month.
Another case with a trend from the start
Sometimes a larger pullback may occur during the first hour of the trading day, before the trend started, but however, a trader should take into consideration only pullbacks, occurring after the start of the trend. With a simple comparison between the size of separate pullbacks, a trader should be able to determine how strong the trend is. If pullbacks appear very small and each subsequent one almost equals the size of the first pullback or is even smaller than it, then the trading day is a strong trend day.
Let us have the following situation. AAPL has formed an uptrend, while the average daily range has been about 16 points. All pullbacks, that occurred during the day were about 3 points. Logically, buyers would prefer a larger pullback, where they could go long, because of the lesser risk. However, such a pullback never came and they began opening small-sized positions on short pullbacks. Following such strategies (buying small positions) during the entire day contributed to markets slow movement to the upside.
Sellers, on the other hand, never had a really good opportunity to go short, so they probably entered small-sized positions using fairly good setups. However, there was no further price action in their direction, so they had to cover (to make additional long entries). This additional buying provided further support to markets move up. Players trading on momentum also spotted the uptrend and continued to make long entries during the entire day.
The trend lasted during the whole trading day, while pullbacks were small, but as buyers have been entering long during the day, they did not need to chase the move up in a rush. As sellers did not manage to short massively, short position covering was not strong as well. So, what conclusion can be drawn? Even though it was a trend day, market movement did not cover too many points, so buyers were unable to make windfall gains.