The Characteristics Of Opening Reversals
Many traders often wonder if they should trade on the opening, or if there are specific strategies that exploit market activity unique to the opening.
The Opening Reversal (OR) is a strategy designed to take advantage of emotional down openings in the stock market that are likely to quickly reverse.
Basic trade criteria: Opening Reversals work best with institutional, market-leading stocks that are components of trading programs, with daily ranges of at least two points.
These positions are entered in the first 30 minutes of trading. A trade set-up (described in terms of buys; reverse for sells) occurs when:
- A stock opens,
- sells off less than one-third of its daily range,
- then reverses back above the open because of improving market dynamics.
- Entry is 1/8-point above the opening.
Select the strongest stocks (the Stock Scanner Relative Strength search is a good place to start looking) that sell down the least from the opening.
These trade opportunities set up because of early morning, futures-related selling, or due to economic news that influences the opening prices. In these situations, if a stock can’t sell off, there is only one place for it to go–up. Buyers arrive and program trading kicks in.
Risk control note: You must keep a tight stop on this kind of trade because it can reverse very quickly into a genuine downtrend.