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.
