Read more about opening types in this post, this one, and this one.
In this post we focus on the Open Test Drive opening type pattern as described on page 65 of Mind Over Markets. The primary benefit of identifying the opening type is to evaluate potential market conviction early in the day. We then use the Footprint chart to qualify the trading opportunities that present themselves by gauging market conviction in real time.
RULE OF THUMB: Use the open type for market context and the Footprint to confirm and execute your ideas.
Open test drive’s are initiative in nature but don’t happen right at the opening bell like the Open Drive opening type. By definition, open test drive occurs when a market opens and then tests beyond a known reference point to see if there is any new business. The market then reverses and quickly auctions back through the open and continues to drive opposite the initial move, exhibiting strong, initiative activity. Often the extreme price established at the reversal soon after the open holds for the entire day.
Before the market can find its direction it needs to first test in the opposite direction to see if there is any “business” to do. There are a couple of common sayings in the market that sum this up:
Break to Rally – this means the market needs to test lower prices first, before rallying. If the test lower lacks volume and initiative activity, buyers can try the higher prices with conviction because lower prices didn’t draw in more participants.
Rally to Break – this means the market needs to test higher prices first, before breaking (selling off). If the test higher lacks volume and initiative activity, sellers can try the lower prices with conviction because higher prices didn’t draw in more participants.
This “testing” behavior provides traders the assurance of knowing there is no activity above or below (depending on the initial direction of the probe) before moving the market the other direction with confidence.
Often you will see this open type occur after a period of consolidation. Look at the Market Profile® chart below, and then how the Footprint® chart helped in confirming the open and kept you on the right side of the trade.
After 2 days of a tight range and low volume, the market opened just above the consolidation range and very briefly tested inside the range to see if aggressive sellers would show up. When they didn’t it gave the initiative (aggressive) buyers the confidence to buy. Price quickly auctioned higher and never looked back for the entire day.
Here is what you want to look for on a Market Profile®
- Market opens and probes beyond a known reference point to test participation.
- Market reverses and quickly trades in the other direction, often establishing one of the extremes for the day.
Below are is a normal Market Profile® and the same one but split to show the 30 minute progression.
Here is what you want to look for on the Footprint® Chart.
- Does initiative activity become evident on the open? The Footprint makes this much easier to see because you can witness in real time what is happening.
- Take note where the open is occurring – near overnight high, low, above/below prior day’s range, etc. Use this information to look for clues on the Footprint.
- Watch the Footprint for failure and play for a trade in the opposite direction, recognizing the potential. Use the Footprint to keep you in the trade longer.
Here the open with the initial move a few ticks lower. There was little interest from the aggressive traders to push price lower, therefore, participants take it the other direction to provoke a response to the upside. That did it! The Footprint confirmed this by showing buyers with conviction (green footprints).
Here is the same move but using a 5 min chart
This shows how quickly this move occurred and with very little pullback. It is very important to note, with this type of open you must be aggressive and get in early. This is not easy to do, but the Footprint will help give you the confidence to spot the setup sooner than you would otherwise because you can see the order flow.