An Easy Way to Recognize Trend Days
An Easy Way to Recognize Trend Days
A simple 3-step process to recognize trend days, using the morning's opening range volatility.
When you see a strong trend day unfolding, do you ever wish you recognized it earlier so you could have traded in the direction of the trend? As traders, we're always looking for ways to identify trends early, before the big move has already happened.
In this post, I'll share a simple 3-step process I use to recognize trend days in the market. Being able to quickly identify trend days sets you up perfectly for momentum trades in the direction of the prevailing trend.
Step 1: Compare the Opening Range to Recent Averages
The first step is to compare the day's opening range to the average range over the past 15-30 days. I like to use our Live Scanner built into the Opening Range Breakout Platform, which shows the average range along with today's range on the Live Scanner (and it shows you only active setups!).
On trend days, the opening range tends to be smaller than average. It represents a period of consolidation before the real move begins. If today's opening range is less than the recent average, it grabs my attention.
For example, if the S&P 500 normally has a 10-15 point average range, but today's opening range is only 5 points, that's the first clue of potential trend day.
Step 2: Watch for a Breakout & Move to Range Extremes
The second step is to see if, after the tight opening range, we get an opening range breakout. Ideally in the direction of the impending trend.
The Live Scanner in the ORB Platform makes this easy by searching 13,000+ stocks and ETFs, and showing you all of the places where we have active breakouts. The Live Scanner will also run an instant 3-month backtest, which you can use as filters to find only the best setups (ie. >70% win rate with a positive trade expectancy and P/L).
In addition, we want to see price move quickly to test the extreme ends of the opening range. So if we breakout to the upside, can buyers take us up to the top end of the range before sellers bring us back down?
Observing stiff continuation followed by momentum picking up is exactly what we want to see after an opening range breakout on a trend day.
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Step 3: Look for Confirmation of Trend Resumption
The third step happens after the opening range play. Here I'm looking for confirmation that the trend is resuming after a period of pullback or consolidation.
My favorite method here is watching for a 3EMA/8EMA momentum cross. When the faster 3EMA crosses up through the slower 8EMA, it signals a resumption of upward momentum.
Entering long as momentum turns favorable allows you to participate in trend continuation at a logical point based on opening range analysis.
***Note this same process works for downside trend days with the principles inverted.
Real Chart Examples
To make this three step process more concrete, let me walk through some actual examples using the S&P 500:
April 19, 2023 - Small 5.5 point opening range preceded trend day to the upside. Bullish momentum cross confirms uptrend resumption after period of pullback.
April 13, 2023 - Similar setup with relatively small opening range followed by run to range extremes. Momentum cross confirms upside breakout.
April 10, 2023 - Not picture perfect but still opening range smaller than usual. Full range target hit after some choppiness. Upside momentum accelerates from there.
As you look at more historical examples, keep an eye out for the telltale signs:
- Smaller than average opening range
- Opening range breakout with momentum
- Confirmation of trend resumption after pullback
Final Thoughts
Being able to quickly recognize the footprint of trend days sets you up for momentum trading success. You can anticipate directional moves, size appropriately, and press trades in the heart of impulsive trends.
The 3 step process outlined here helps narrow down higher probability trend setups. Keep it bookmarked for review before each trading session so you can be prepared.
As always, combine opening range analysis with other confluence like volume and price action. I hope you find this useful as you work to improve your timing identifying bigger trend moves!