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.
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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.
Sincerely,
Douglas Newberry
Investing Systems Research Lab
would like to see ideas for lat hour trading. hank
DEAR SIR,
NICELY SAID AND CONFIRMED. TILL NOW I WAS OF THE OPINION THAT I LOST THE MARKET ENTRY AS SOON AS THE MARKET OPENS. HOWEVER I EXPERIENCED WHENEVER I BOUGHT STOCK AT THE OPEN BELL AT MARKET RATE, MANY TIMES I HAVE LOST - MARKET SUBSEQUENTLY GOING DOWN.
I CONCLUDED I SHOULD WAIT FOR THE "DUST TO SETTLE" AFTER WHICH I CAN EXECUTE TRADE AND AGAIN PROFIT FROM THEM INSTEAD OF LOSING. THE MADNESS OF "BEING FIRST TO BUY" MANY TIMES RESULT IN LOSS.
YOUR CONFIRMATION OF THIS HAS HELPED ME DECIDE TO WAIT, WATCH AND THEN ACT. THANKS ONCE AGAIN.
Great tip with good explanation. I have a question regarding Forex money management. Any one familiar with the issue may respond if interested. I was told many people use an Excel spreadsheet to keep track of their constant balance fluctuations from day to day but I am not sure how to set it up. I know to type in the currencies but what do I make it calculate and what order. Is their a site online of how to do this? I am currently using my own custom made sheet. If your Forex software already comes with EMA, and other tools proving this data why would this be included in a spread sheet as well. How would one set this up? Any ideas would be great!
I have had many of my stocks gaped up like this. The easiest way to make money is to find stocks that like to gap up. Unlike performance, pass behavior mostly indicates future behavior. Buy them when they are consolidating and set Limit sell order GTC around 10 percents below previous peak or top resistance line. Don't be greedy.
When the gap happens, bye bye, caching, caching!
Stocks and ETFs that like to gap: EDC ANR ACH FSLR FAS
I refuse to sell my BIDU, rode with it all to way down to around $100, scared the heck out of me!
ATTN BRAD: The black background screens are useless. I can only see the candles (no shadows) and the white lines, whatever they represent.
Why does anyone use such chart screens?
Adam uses a white background chart as you know. His presentations, therefore, are readable and meaningful.
I attend many webinars a month, look at many charts on several websites, and those that use black background screens are few, but I've harped to them about the same unreadable issue.
If you think it's the setings on my computer I'd like to know about it. Why only with black screens? All data is too faint to read. All data on screens that are black on white, are quite clear. Again, why is anyone using these white on black screens?!
William,
Thanks for the heads up! From now and on all guest bloggers will use charts that have the white background to make sure it's clear and easy to see.
With regard to why...to each his own I guess. Me personally I prefer the white charts, but Douglas likes the black, and I know a few here in the office that use the black.
Thanks for the feedback and thanks for commenting!
Cheers,
Brad
I prefer the black background. It's easier on the eyes and I can see the candles clearer/mentally absorb the chart better. I have no idea what it's meant by "(no shadows)" ... :::shrug:::
Thanks for your insight on trading the open.
What I wanted to know is why is one advised to wait after 10AM to enter with the prevailing move. What makes 10AM the best time to enter?
Thanks again and regards,
Johnny
Hi Johnny,
There is nothing "magic" about ten o'clock.
We have been watching the open this way for years and "typically" we see a stock move up, have a pullback, then move up again. If the high for example was set at 9:40, and pulled back, then you watch for it to break the high that was set prior to ten o'clock.
We also suggest a buy limit order above the high, so you can be sure the stock is moving up through the target entry price.
JAZZ would be a good example today. The high was set right out of the gate, and then pushed higher and made a nice move.
I hope this helps.
Doug
I have seen this in the Forex market as well. It does not work every time - so be carefull!
Thanks for the comments guys.
Trading from the open has been a great stategy for us. I am glad you like it.
Excellent article! And one that can prove quite profitable day by day, month by month.
The INO site has some very good reading!
Thanks!
I don't trade stocks I only trade commodities. I have seen this happen in commodities many times and never thought to take advantage of it.
Thanks for your imput Douglas. Happy trading and holidays.
Ray