Tonight's Trading Lesson From TradingMarkets

A Flip Top (FTP) is a simple but effective day trading strategy that is a slight variation of the Opening Reversal. FTPs attempt to capture the first real trading move after a stock makes both a new high and new low in the first hour of trading.

When a stock opens, it will make either a new high, a new low, or both, after it trades away from the opening price. Just as the S&P 500 futures traders will often run the stops on both ends, after which a trend often develops, you can catch a similar move with a stock.

Stocks that best fit this strategy share the following characteristics:

• high relative performance (vs. S&P 500);
• good volatility;
• trending (ADX > 25);
• average daily range of at least 2 points.

Here's how a Flip Top trade sets up (for buys; reverse for sells):

1. Stock opens, then trades higher at least 1/4 above open (new high);
2. Stock reverses and trades below the opening price (new low);
3. Stock reverses again and trades back up and through intra-day high made in step 1;
4. Enter 1/8 above high of step 1.

Figure 1 shows a diagram outlining the Flip Top pattern and the relationships discussed above.

Note: Only take the trade if the spread between the high (1) and low (2) is no more than half of the stock's average daily range (use the last five days). For example, if a stock has an average daily range of three points and the spread between the high and low is one point, you can take the trade because you have good profit expansion potential based on the excess daily range.

Figure 1. Flip Top. The half-point spread between the 60 1/4 high (1) and the 59 3/4 low (2) leaves a profit potential for a stock with a 2 1/2-point average daily range.

Stops:No strategy is complete without risk control. You can place a stop just below the open, or no more than 3/8- to 1/2-point away from your entry point.

For more on how Kevin trades, click here.