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This Liquidity Scalping Strategy Will Transform Your Day Trading - YouTube
Channel: The Secret Mindset
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How do you trade the opening of a trading
session?
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It doesn’t matter if it’s London or the
New York one.
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You probably heard about the opening range
strategy.
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Let me guess, you were told to mark the opening
of the session and then you simply trade a
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breakout.
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But, is this really a consistent strategy?
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Does it bring consistent profits?
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Actually, no!
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Today I plan to share a different approach
to trade the opening range.
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It involves finding liquidity zones, where
a lot of traders set their stop losses and
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fading the initial momentum.
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It’s gonna be interesting.
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So, like, subscribe to the channel, and stick
around for the full video.
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Opening Range Breakout
Right at the market open (let’s say, New
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York time), markets usually experience volatile
price action that arises from heavy buy and
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sell orders that come into the market.
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This heavy trading in the first five minutes
is the result of the profit or loss taking
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of the overnight holders, as well as new investors
and traders.
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If the price has gapped up, some overnight
traders will start selling their position
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for a profit.
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At the same time, some new traders might jump
in to buy, before the price goes higher.
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If price gaps down, on the other hand, some
traders might panic and close their traders
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right at the Open before it drops any lower.
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On the other side, some institutions might
think this drop could be a good buying opportunity
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and they will start buying large positions
at a discounted price.
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You see how there is a complicated mass psychology
unfolding at the Open of the trading session.
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My advice is to wait during the first 5 minutes,
when market opens.
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It’s better to watch for the opening ranges
to develop and allow the other traders to
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fight against each other until one side wins.
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Typically, you want to give the opening range
at least five minutes.
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You can wait even longer, such as 15 minutes
or 30 minutes, to identify the balance of
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the power between the buyers and sellers.
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The longer the time frame, the less volatility
you can expect.
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Then you need to develop a trade plan when
a breakout occurs.
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Now, the Opening Range Breakout tends to work
best with mid to large cap stocks.
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I do not like trading this strategy with low
volume stocks or penny stocks that have gapped
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up or down.
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And here another tip to filter the best markets
to trade.
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Ideally, the stock should trade within a range
which is smaller than its Average True Range
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(ATR).
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Opening range indicator
There are various definitions of what the
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opening range means.
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I call it the gap between the low and high
price of the first minutes of trading.
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Here’s an indicator which helps you to plot
the opening range.
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It’s a versatile one, because it allows
you to easily change the range period.
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Being a day trading and scalping technique,
we’ll check the 5 minute opening range high
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and 5 minute opening range low.
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But again, you can try different ranges, for
5 minutes to one hour.
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With this settings, the indicators draws a
channel after the first 5 minute candle of
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the New York session.
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One line at the candle’s high and one line
at the candle’s low.
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A breakout of the opening range occurs when,
after the first 5 minutes, the price crosses
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the highest or lowest line.
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• Either the price breaks out and starts
on a new trend.
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• Or it reverses and the price dives back
into the existing channel.
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Often times, the opening range is the comfort
zone of the day.
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Liquidity clear-outs
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Like I said before, the classic method is
to trade the direction of the breakout.
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And it works sometimes, but is not that consistent.
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Many times you’ll find that price breaks
the range, and instead of continuing this
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momentum, will return inside the range, maybe
breaking the other side too.
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This is a form of liquidity hunting.
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Liquidity hunting can be explained as the
process of removing the weak positions out
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of the market.
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Smart Money will trap retail traders into
the market at poor trade locations and then
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move against their positions, stopping them
out.
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A liquidity hunt is basically an event where
the stop losses of buyers or sellers are taken
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out, and the breakout traders are trapped
in.
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I’ve talked about liquidity clear-outs in
this video, if you want to know more about
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this process.
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But what you need to understand is that these
events are most common around price structures
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where many traders will watch the same price
level or place stop losses around the same
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price level.
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Do you think the opening range is a price
structure that might be targeted by smart
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money?
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Of course it is.
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Smart money would want to see that range broken
and enter their positions while liquidation
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is taking place and absorb opposite orders.
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That’s why you lose money when you trade
the opening range breakout, the classic way.
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Fading the ORB
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Here’s a better technique.
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You need to find pockets of liquidity around
the opening range.
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Watch for swing lows or swing highs in the
market structure, where the majority of condensed
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stop losses will sit and where breakout traders
might initiate other positions.
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If price is breaking the opening range, and
then enters a potential liquidity zone, which
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could be targeted by smart money, you fade
the breakout, you enter in the opposite direction.
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So, when price returns to the opening range,
and liquidity was absorbed, you enter in the
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opposite direction of the breakout.
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Fading the opening range has some good logic
behind it.
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Anyone who’s tried a breakout strategy will
know how challenging it can be.
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Too many breakouts don’t work out the way
you expect them to.
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Many breakouts that start off strongly quickly
fade and start to track back into a range.
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That’s why fading the initial momentum has
potential.
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The profits to be made from a fading strategy
may not be huge.
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But nevertheless it can be rewarding if you
know how to do it.
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To summarize the trade plan:
1.
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After you build your watch list, you monitor
the shortlisted stocks in the first five minutes
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after the Open.
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You identify their opening range and their
price action.
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Is the price jumping up and down or does it
have a directional upward or downward movement?
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Is it high volume, or it’s a quiet opening,
with less activity?
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2.
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The opening range must be significantly smaller
than the stock’s Average True Range (ATR).
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3.
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If you see the price is breaking the opening
range, watch for immediate price levels where
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other retail traders may place their entries
or stop losses.
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4.
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If price enters the potential liquidity area,
and returns to the opening range, you find
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a trade in the direction of the current momentum,
against the initial breakout.
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5.
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Regarding stops and take profits, I’m still
trying to find the proper location.
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Obviously, a good level to place your stop
would be above or below the most recent liquidity
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clear-out.
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And two times the risk is a good level to
target.
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But in some cases, if you don’t want to
hold the position overnight, you’ll have
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to settle with less.
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Always remember that fading the breakout is
a short term strategy.
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So do not expect a home run while taking such
trade.
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Here’s Tesla on the 5 minute time frame.
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During the first trading day, we have a small
breakout above resistance, and we also have
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a breakout above this small liquidity area.
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The breakout wasn’t so powerful, but technically,
it checked our conditions, so we could have
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taken a short trade when price was inside
the channel.
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The next day, we didn’t have a signal.
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The price broke the opening range and continued
lower in the first part of the session, and
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slowly recovered during the second part of
the trading day.
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The third day offered the best signal.
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We have the opening range and the firm breakout
above it.
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Price also broke above this area liquidity
area.
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Here’s an important tip: as time passes
and if price cannot break areas with multiple
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highs, chances are the liquidity around those
price levels will increase with time.
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This was a classic liquidation event where
the stop losses of sellers are taken out,
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and the breakout long traders are trapped
in.
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When price returned inside the channel, using
this technique, a short trade, against the
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initial breakout was the high-probability
move.
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Again, depending where you enter, you must
have a positive risk to reward ratio.
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Ideally, the stop loss goes above this high,
but if the distance is too big, and you don’t
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get a proper reward for the risk being taken,
you need to adjust the stop loss.
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We trade Netflix on the 5 minute time frame.
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During the first day, we have a breakout above
opening range resistance, but we don’t have
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a liquidity clear out.
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But observe how fading the breakout proved
to be a good opportunity, even without the
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liquidity clear-out.
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Now in hindsight, I see this support level,
which was broken, and now is acting as a resistance.
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And when the opening range was broken, the
price found resistance at the previous support.
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The point is, you can come up with your own
entries, even without the liquidity clear-out.
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The second day offered us another trade.
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We first have the opening range breakout,
this time below support.
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We then have another breakout, below this
swing low, which is a clear liquidity area,
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possibly targeted by smart money.
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And price indeed changed direction after the
breakout and returned inside the channel.
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Which was a good opportunity to enter a long
position.
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The third day, another decent trade.
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Observe the breakout above the opening range
and above this major liquidity area.
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After the liquidity clear out above the highs,
the price reversed back inside the range structure
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relatively quickly.
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And here’s another tip: timing is key.
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It shouldn’t take much time for the price
to rotate back below the broken resistance.
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Not necessarily inside the opening range,
but below the liquidity area.
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In the best scenario, it happens within the
next 5 to 10 candles.
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There aren’t set rules for the entry.
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You could use price action patterns, candlesticks,
and even indicators to enter, after the liquidity
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clear-out.
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But the price must at least touch the upper
line of the opening range.
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I hope you see the logic behind this technique.
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3 consecutive days, and not one single clear
breakout, in the initial direction.
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The liquidity clear out condition will filter
many trading opportunities.
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If you trade markets with a low ATR and that
have a somewhat smaller daily range, you won’t
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find trade signals every day.
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Trades which are backed by liquidity clear-outs
have the highest probabilities.
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If you want to be more active, you need to
take into account other factors, to find trades,
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against the initial breakout.
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So you’ll still fade the opening range breakout,
but you’ll rely on price action or volume
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to find opportunities.
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In this chart, we found the opening range
breakout, plus the liquidity clearout and
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a retracement back to the channel.
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The strongest signal to sell.
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The second day, we didn’t have any trades,
as price broke the opening range and continued
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downward.
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Third day, we have a downward breakout, and
a slow and steady uptrend for the rest of
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the day.
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No liquidity clear-out, but the fading aspect
worked.
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Forth day, no signal.
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We had a breakout and a continuation move.
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5th day, we had the earnings release.
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A big gap up and a wide 15 minute candle.
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My advice is to simply don’t trade during
these days, as the market can be quite unpredictable.
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Next day we had a breakout, and another reversal.
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And in the following day, the same scenario.
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Breakout, price found resistance, reversed
inside the range, and continued its downwards
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momentum.
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So, during this period, one valid signal,
with liquidity clear-out confirmation, 4 fading
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days, during which price reversed after the
breakout, 2 breakout continuation days, and
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one range day, during the earnings release.
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You can see why fading the opening range might
be the better trade, instead of trading the
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initial breakout.
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This technique was based on the New York open,
but the same principles apply if you trade
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Forex or crypto, and you want to trade the
London open.
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If you found value and want a follow up video,
leave us a like.
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This way we’ll know if you'd like to see
more videos like this one.
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And check out our academy program if you want
to further level up your trading.
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Until next time.
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