The opening range is the range of high and low prices that a security’s price falls within during the first few minutes or hours of daily trading activity. Opening ranges are important to technical analysts and day traders because they can provide an indication of sentiment and price trend for the day.
The opening range is one of several price ranges that technical analysts will follow when watching a technical analysis chart. Ranges in general can be a powerful indicator for technical analysts. As such, the concept of envelope channels is built around providing ranges for which a security’s price trades within.
Bollinger Bands are one of the mostly commonly used envelope channels for following the trading range of a security. The Bollinger Band channel includes a resistance and support line drawn two standard deviations above and below a stock price’s moving average. This channel creates an ongoing range with a high and low price that a trader can use as a guide for betting on a security’s price movement throughout the day.
Investors and traders can draw opening range charts using a variety of charting resources. The chart below shows the opening range of Best Buy on Friday, May 25, 2018, a day after the release of its first quarter earnings before the opening bell on May 28th.
This opening range chart follows the first 15 minutes of the stock’s open using a Bollinger Band overlay.
Many investors will often follow the opening range of a security’s price before or after a significant announcement has been made. Investors may also choose to follow the opening range of a stock to consider its sentiment in conjunction with a potential trading idea.
The opening range chart can show strength, weakness or a sideways trend with no clear sentiment. Most charts will display the day’s high and low at the top of the chart which shows the exact trading range from open through the current time period.
In the Best Buy chart, the stock opened at $71.00 which was just above its previous close of $70.90. In the first 15 minutes of trading the stock trended lower showing weakness. It consistently traded below its moving average. It also fell below its Bollinger Band support trendline. This chart’s weakness and the stock’s tendency to trade below its moving average trendline in the first 15 minutes of trading would generally signify a weak trading day for this stock.
Overall, traders can use varying patterns and timeframes to follow the opening range of a stock. A stock’s opening price in comparison to the previous day’s closing price can be one signal for the day’s trend. Some investors may choose to follow only a few minutes of the opening price chart while other investors may like to see an hour or more before drawing a conclusion from the opening range.