Tonight’s Trading Lesson
Editor’s
Note:Each night we feature a different lesson from TM
University. I hope you enjoy and
profit from these. E-mail
me if you have any questions.Brice
The Characteristics Of
Opening Reversals
TradingMarkets.com
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.