Today I've invited Douglas Newberry from Investing Systems Research Lab to come and impart some "open" wisdom upon us. The article is a short one with some good chart examples for you to glance over. Please enjoy the article, comment (as always), and visit Investing Systems Research Lab.
Holding overnight can be dangerous and being on the wrong side of the "morning gap" has taken its toll on all of us at one time or another. This is just one of the many reason we like trading from the open.
Trading from the open can be a real adventure, but when you think about it there are really only a couple things that can happen.
Stocks can open flat in which case one must let the market establish a bias for the day. It is always better to wait out the first few minutes in order to let all the overnight orders clear and then we can see what will happen today.
Another way to start the day is with a big gap in one direction or the other. This is where opportunity lies. Keeping an eye on how a stock moves from the open is often a much better strategy than looking at what has happened since the previous close.
Take a peek at this chart...
As you can see BIDU fell out of bed right at the open in a big way. Most were probably looking to short it after such a big gap down thinking that the news was bad. Many times when a stock gaps up or down it a great opportunity to go the other way.
Buying into this stock long right at the open would have been very dangerous, but after having seen a few bars building the chart for the day you could have gone long with much more confidence.
One strategy we like to employ is trading above the ten o'clock high. You can see the line representing the high for the day prior to 10 o'clock and placing a buy order just above the line would have given you ample opportunity to make some gains on the day and you only get filled if the move is confirmed.
This is a strategy that works just as well if the stock had gapped up as long as it trades above the 10 o'clock high.
Conversely, here is a look at Sanderson Farms...
As you can see it had a huge gap up, pushed slightly higher and then started fading for the remainder of the session. Watching for this stock to break out above the 10 o'clock high would have been futile, however you could have shorted the stock after the big gap and played the fade.
We see this kind of activity all the time with our early scans of the market and have developed several list of stocks to watch based on this technology.
When trading from the open you must be prepared for the idea that the media will be on the wrong side of the trade so don't count on them to give you any trading advice on an intra day basis.
In the BIDU example the financial media would have been telling you all day that BIDU was down. It was down from the previous close, but from the open it was rockin'. You could have banked some gains going against what the financial media was telling you.
The same is true for the SAFM example. The media will be telling you all day how much it is up from the previous close, and you would be making a very nice trade going the other way.
Even after the big drop they would still be on the wrong side as the stock never reached the previous close to make them change their tune.
When you want to trade from the open it is important to always keep an eye on the overall market conditions. Most stocks move with the market and even those that are trading in counter-trend are still not operating in a vacuum.
When the overall market changes direction, many times the stocks will do the same so never take your eye off the ball.
Trading from the open can also provide continuations moves, gap up, push higher as well as gap down and pushing lower. These trades can be just as profitable but be sure you get confirmation before you jump right it.
Finally, trading from the open can be very profitable but do not get too excited in the first few ticks of the day, be sure you can manage a good entry strategy on the chart before you move. Be careful out there.
Investing Systems Research Lab