Trend Days Versus Range Days on Index Charts

An index day is rarely a mixture. It tends to be a trend day, in which the market opens, moves in one direction and closes near the extreme, or a range day, in which it oscillates around a central value and closes near where it opened. The two call for opposite tactics, and the first hour usually tells you which one you are in.

Trend days

A trend day shows its hand early. The opening range is broken in the first thirty minutes, candles expand in the direction of the break, pullbacks are shallow and short, and the volume-weighted average price keeps rising or falling with price never crossing back through it. By midday the index is well beyond the opening range and the question is only how far it will go.

Tactics for a trend day:

• Enter on the first shallow pullback after the opening range break, with the stop beyond the pullback
• Trail the stop behind each higher low or lower high
• Do not fade the move; counter-trend trades on trend days are where range traders lose their month

Range days

A range day shows its hand too. The opening range is tested on both sides without a clean break, candles overlap, price crosses the volume-weighted average repeatedly, and moves that start fade within a few candles. By midday the index is still inside or near the opening range.

Tactics for a range day:

• Fade the edges of the morning range once they have held at least once
• Target the middle of the range or the average price, not the opposite edge
• Keep stops just beyond the edge and accept small losses on the first break

The tell

The clearest single clue is the relationship between price and the volume-weighted average. Price that stays on one side of it is a trend day; price that crosses it repeatedly is a range day. A second clue is the first pullback: on a trend day it is shallow and quickly bought or sold; on a range day it travels all the way back.

Days change character, usually around a scheduled release or the US open. When the tell changes, the tactics change with it.

What to watch

Watch the first thirty minutes for a clean break or a double test of the opening range, the position of price relative to the average price through the morning, and the depth of the first pullback. Record the type of each day; over a month the record will show which type your strategy is built for.