A Basic Trading Strategy for Trading the Open
by Chris Curran of Tradewinds Online Trading the Open: Some Preliminary Information
To get started, it’s important to note some things about the charts used in this strategy, as well as to provide some definitions of the terms used. The strategy trades using the S&P E-Minis (the popular mini stock index futures traded on the CME), so, to use the strategy, you must subscribe to an eSignal package with the CME E-Minis datafeed. First, some definitions: the TICK is the NYSE broader market cumulative TICK, and it simply measures the number of stocks in an uptick minus the number of stocks in a downtick. Note that the chart (shown in “Trading the Open: The Set-Up”) to which it is applied as a symbol has ($TICK,1) in the top left corner. PREM, or the premium, is the difference between the lead S&P 500 futures contract and the underlying cash S&P 500 index. By knowing where the day’s fair value, buy premium and sell discount levels are, a trader can have a general knowledge of where program trades can come into the market. Note that the chart to which it is applied as a symbol has ($PREM,1) in the top left corner. You will want to set up and save a Layout in your eSignal application app lication with a chart showing the E-Minis (ES) at the top and $TICK and $PREM charts below it.
Trading the Open: The Set-Up 1. I use a 3-minu 3-minute te chart for the the ES (the (the S&P 500 E-Mini E-Mini contract) contract),, but you can use a 5-minute chart if you are comfortable with that time frame. 2. I have the the high, low low and close close of the the prior prior day as horizontal horizontal lines lines on my chart. I also plot the open as a horizontal line on my chart. 3. I place place a 1-minute 1-minute TICK and and 1-minute 1-minute PREM chart chart below below the the 3minute ES chart. Trading the Open: Rules of Thumb 1. I normally normally wait wait 10 - 15 minutes minutes after after the the open to let let the overnig overnight ht "market on open" orders get filled. 2. If the price price is is between between the prior prior day’s day’s close close and the the current current day’s day’s open, it is neutral, and it is best to stand aside until the market shows a long or short bias. 3. Exceptions Exceptions to to these rules are extreme extreme gap openings, openings, of which which there are 4 types, divided into "buying" "bu ying" and "shorting" categories: For buying: • •
Gap Up Long Gap Down Long
For shorting: • •
Gap Up Short Gap Down Short
Trading the Open: Some General Facts about Gaps
A gap between 0 and 1% will have an 85% chance of retracing at least halfway and a 78% chance of retracing 90 to 100%. Gaps between 1 and 2% are not quite as reliable when it comes to retracement. 78% of them will retrace at least halfway while just 60% will retrace 90 to 1 00%. So, it’s important to know the size of the gap.
Gap Up Long
Before You Start: Remember: A larger gap has less of a chance of filling completely, and I think these can be the toughest to trade. 1. Wait 10 - 15 15 minutes minutes after after the the open, and watch watch for pullbacks. pullbacks. 2. If there there isn’t isn’t a pullback, pullback, then then use the the 1st bar/can bar/candle dle low as as your stop. 3. If that that is too too far for for your your money management management rules, rules, use a money stop. stop. Look at This Example Again: In this Gap Up Long, the ES never tested the low or the opening price. Because of that, the ES was net positive all day long.
Gap Down Long
1. After waiti waiting ng 10 - 15 minutes minutes to let overni overnight ght orders orders get filled, filled, take take the entry entry on a price cross back above the opening price with TICK confirmation. Look at This Example Again: In this example, the ES gapped down at the open. It then tested a pivot line (S1) and retraced back to the opening price. The entry was taken above the trigger bar when it was confirmed by TICK strength. The stop was 2 points, for a good reward/risk potential.
As you can see, the initial entry was stopped out. But, patience and persistence paid off and, after the price tested S1 and held again, a 2nd entry was taken and paid off nicely. Additional positions could have been taken on the 5/15 MA cross and on the price cross above the prior session’s close.
Gap Up Short
Before You Start: This set-up takes advantage of the so-called "gap and trap" open. If the market gaps up through the upper Bollinger band, a short trade would trigger when the price drops below the opening price and is confirmed by a weakening TICK. 1. Place your stop just above the the high high point point of the day. day. 2. Or, use a money money stop stop if the high high is too far far away. (In (In this situation, situation, you you are not restri restricted cted to waiting 15 minutes. You have to be prepared before the open and know where the overnight Globex high and low are.) Look at This Example Again: The solid blue line is the opening price. As you can see, the market gapped up and pierced the upper Bollinger Band. The TICK and PREM also went negative early, giving additional confirmation. The short entry was below the opening price. One of the best ways to be prepared and to get your entry is to use a sell stop.
Gap Down Short
Before You Start: The ES gapped down 1.3%, giving just a 60% chance of a gap fill. Patience is key 1. Wait 10 - 15 15 minutes minutes for for the overnight overnight orders orders to to be fille filled. d. 2. Take your your entry entry on the cross cross below below the the opening opening price price with a 2-point 2-point stop. Look at This Example Again: The solid blue line is the opening price, and the entry was taken on a cross below the opening price with a 2-point stop. Notice, once again, that a sell stop is a great tool to get your entry.
