This article covers the four opening types identified by Dalton — Open-Drive, Open-Test-Drive, Open-Rejection-Reverse, and Open-Auction — and the framework for estimating daily range potential based on the opening’s relationship to the previous day’s value area and range. The open is the single richest source of early market-generated information available to the day trader. Understanding the first few minutes of trade is the foundation of daily strategy.
- Part I: The Four Opening Types
- Part II: Opening Relationship to Previous Day
- Part III: Range Estimation
Part I: The Four Opening Types
The Opening Call
Before the session begins, a succession of opening calls indicate where the market is expected to open. The final call before the bell and the relationship of that call to the actual opening are already a form of other timeframe activity:
- If the call is 87:19 but the actual open is 87:12, there is effectively a 7-tick hidden selling tail
- This hidden tail is responsive or initiative depending on where it sits relative to the previous day’s value area
- The pre-open auction is composed almost exclusively of other timeframe participants — the largest accounts with direct floor access
Open-Drive
Definition: The market opens and immediately auctions aggressively in one direction without returning to trade back through the opening range. Other timeframe participants have already made their decision before the bell.
Structural signature:
- Strong initiating tail in A period
- Price drives immediately in one direction (rarely revisits the opening area)
- Often creates the Trend or Normal Variation day type
- The extreme left behind by the open-drive is the most reliable day extreme
Trading application: Enter with the drive as early as possible. Do not wait for pullbacks on a genuine Open-Drive — the market may not give one. Buy stops should be placed at the level that would erase the tail. If the market returns to trade through the opening range, conditions have changed; exit.
IMPORTANT
Open-Drive openings provide the best trade location opportunity precisely when they are the most difficult to act on. They require buying into obvious strength or selling into obvious weakness. The market never feels safe at the moment of best opportunity.
Open-Test-Drive
Definition: The market opens, tests in one direction to probe beyond a known reference point (previous day’s high or low, bracket extreme), finds no continuation, then reverses and drives strongly in the opposite direction. The initial test “needed” to happen to confirm there was no new business in that direction.
Structural signature:
- Initial probe beyond a reference point
- No follow-through on the test
- Swift reversal and driving auction in the opposite direction
- The tested extreme provides a reliable reference point for stop placement
The psychology: “Sometimes markets need to break to rally, and rally to break.” Before buyers can drive with conviction, they need to see that lower prices attracted no new sellers. The test failure gives them confidence to push aggressively higher. This is why the best entries on Open-Test-Drive days often occur right as the initial test is failing — counter to the most recent market activity.
Trading application: Similar to Open-Drive strategy: enter early in the direction of the drive, not on the test. The tested extreme is the stop reference. The tested extreme holds with slightly less reliability than the Open-Drive extreme.
Open-Rejection-Reverse
Definition: The market opens, auctions in one direction, then meets opposite activity strong enough to reverse price back through the opening range. The initial extreme is established when the first direction runs out, not by aggressive other timeframe entry.
Structural signature:
- Market opens, moves in one direction
- Activity stalls; opposite participants reverse price through the opening range
- Lower conviction than Open-Drive or Open-Test-Drive
- Initial extremes hold less than half the time
Implication for day type: Open-Rejection-Reverse conveys significantly lower directional conviction. Expect a two-sided day: Normal, Normal Variation, or Neutral. The probability of a Trend day is low.
Trading application: Exercise patience. After the initial reversal, price often moves swiftly against the original direction, tempting traders to chase. Remember: the low conviction means this move may reverse as well. Wait for the market to rotate back before entering trades. Do not scramble to enter on the initial swing.
Open-Auction
Definition: The market appears to open with no conviction, auctioning back and forth around the opening range without a clear directional push. The interpretation depends critically on where the market opens relative to the previous day.
Open-Auction in Range
Market opens within the prior day’s range and auctions around the open.
Implications: Market sentiment has not changed. Extreme low conviction for a big directional move. The day will likely be a Nontrend, Normal, or Neutral type with limited range.
Trading application: Identify extremes as they develop and trade the value area boundaries responsively. If no opportunity develops, stand aside.
Open-Auction out of Range
Market opens outside the prior day’s range and auctions around the open.
This is a fundamentally different situation. Despite the apparent lack of early conviction in the structure, the gap higher or lower itself signals the other timeframe has already acted — price has moved significantly between sessions. The market is out of balance, and dramatic moves in either direction are possible.
Implication for day type: Out-of-range Open-Auctions frequently develop into Double Distribution Trend days. The initial balance is often narrow, providing little resistance to an aggressive later move.
Trading application: Be ready to enter with range extension in either direction. The market could move up (if the gap holds) or reverse violently (if responsive participants erase the gap). Monitor the gap for support or resistance.
Part II: Opening Relationship to Previous Day
Why This Matters
The single most important contextual fact about any day’s potential is where the market opens relative to the previous day’s value area and range. This determines:
- Whether the market is in balance or out of balance
- Trade risk and opportunity potential
- Range development probability
NOTE
A market that opens within the prior day’s value area is like a ball bouncing on flat pavement. A market that opens outside the prior day’s range is like a ball hitting cracked concrete — unpredictable, potentially explosive.
The Three Relationships
Open within Previous Day’s Value Area
The market has not changed significantly overnight. Participants in both timeframes have similar views of value.
- Balance: low risk, low opportunity
- Expected range: similar to previous day’s range, contained within prior extremes or overlapping slightly
- Day type bias: Normal, Nontrend, or low-conviction Neutral
Acceptance (balance): If the market opens within value and builds double TPOs there, range is likely to stay within or near the previous day’s range. Superimpose the prior day’s range length from the established extreme to estimate the day’s range.
Rejection (breakout): If the market opens within value but then drives aggressively out of value and the prior day’s range during the first half-hour, the market is breaking out of balance. Risk and opportunity are now unlimited in the direction of the breakout.
Open outside Value but within Range
The market has shifted somewhat but not dramatically. The ball bounced over the curb but is still in the street. Range expectation is slightly greater than the prior day — typically overlapping one extreme.
Acceptance: Range will usually extend slightly beyond the prior day’s extreme in the direction of the opening.
Rejection: If price then breaks beyond the opposite extreme of the prior day’s range, unlimited range potential in that direction.
Open outside Previous Day’s Range
The market is clearly out of balance. The other timeframe has changed its perception of value between sessions. The highest risk and highest opportunity combination.
Acceptance (continuation): Market opens beyond prior range and continues in that direction. Unlimited range potential. Trend day likely. Get positioned early and stay with it.
Rejection: Market opens beyond prior range but is immediately rejected back into the prior range by responsive participants. Unlimited range potential in the opposite direction. This often leads to a dramatic outside day.
IMPORTANT
A gap is a special case of Open outside Range. A gap is also a form of excess — an “invisible tail.” As long as the gap holds, it offers support (buy gap) or resistance (sell gap). If the gap is filled within the first hour, the probability of continuation in the original gap direction drops significantly.
Part III: Range Estimation
The Framework
Once the opening type and previous-day relationship are known, it is possible to estimate the developing day’s range potential. This is not a prediction — it is a probabilistic expectation that informs trade management.
Guidelines:
- Determine the opening’s relationship to prior value and range
- Identify which initial extreme has the greatest probability of holding
- Superimpose the length of the previous day’s range from that extreme
- Allow approximately 10% flexibility in either direction
- Adjust the estimate as the day develops and new information emerges
Range Estimation by Opening Type
| Opening Scenario | Range Estimate Method | Reliability |
|---|---|---|
| Open within value, acceptance | Prior day’s range length from secure extreme | High |
| Open outside value but within range | Prior day’s range length, adjusted for gap to extreme | Moderate |
| Open outside range | Unlimited in direction of breakout (or opposite on rejection) | N/A |
| Open within spike | Use spike’s length as the range estimate | Moderate-High |
The Spike Variant
When the prior day created a spike (price trending away from value in the final periods), the next day’s range estimation uses the spike’s length rather than the full day’s range:
- Open within spike: use spike range for estimation
- Open above buying spike: unlimited upside, spike top provides support on pullbacks
- Open below selling spike: unlimited downside, spike bottom provides resistance on rallies
- Open rejects spike: watch for powerful reversal; spike becomes the direction
Practical Application: April 13, 1989 Case Study
On this day, Dalton details six different markets all experiencing different open/value relationships simultaneously. The key insight: each market required an independent assessment of its opening relationship. Crude oil gapped above previous range (out of balance) but then accepted value back — unlimited downside potential. Gold opened and drove with an initiative buying tail, but accepted value within the prior day’s range — range limited. Treasury bonds opened within value — low opportunity day.
The same session produced Trend days, Normal Variation days, and a near-Nontrend day across six markets, demonstrating that the opening relationship analysis is essential to calibrating expectations before the session unfolds.
Sources
- Jim Dalton, Eric Jones, Robert Dalton, Mind Over Markets (Updated Edition, Wiley Trading)