With the increasing trends of investing and startups giving an unprecedented boost to the stock market, almost every other person is looking for ways to earn money through trading. This search for information has led to the common man coming across a plethora of trading techniques and options. A prominent one among those is intraday trading.
Intraday trading involves the trading of stock within a single day. That means stocks that are bought and sold within the same working day before the stock market wraps up. It is expected that almost any stock will undergo various fluctuations in price throughout the day.
Traders who use this strategy utilize the fluctuations experienced by a stock within a day and use it for making a profit. Also known as Day Trading, this method is used by both rookie and experienced traders alike due to its simplicity.
There exists a number of intraday trading strategies to maximize your profits, such as Momentum Trading Strategy, Reversal Trading Strategy, Breakout Trading Strategy, Gap and Go Trading Strategy, etc.
But one of the easiest and simplest to use and understand is the Open High Open Low Strategy.
The Basics of Trading
Before we dive deep into Open High Low Strategy and its position in the intraday trading market, let us understand some of the terms associated with it.
Open refers to the price at which the first trade of the stock will be made in a day. An open is quite important to stock and its performance throughout the day as it reflects all the changes in information between the last close of the previous day and the last time at which investors can place orders.
Any new knowledge that comes to light within the last trade made of the stock in the previous day and the last moment anyone could place an order before the market opens, is reflected in the open.
High and Low
High and low are measures of how the price of the stock is performing in the market. A high is used to denote the highest price that a stock has reached in a day. If data suggests that a good high can be reached, then that gives investors a reason to buy more stock to increase their profits.
A low, on the other hand, is the lowest price that stock reaches in a day. A low that keeps dropping is a sure shot sign that investors should sell their stock to keep their losses at a minimum.
A stop loss is regarded as a safety net in trading. It is a price below which an investor will not allow themselves to hold stock. For example, let us say that an investor buys a stock at ₹1,000 and keeps a stop loss at ₹800. This means that regardless of how high the price of the stock goes, once it reaches a price of ₹800, the investor will automatically sell it in order to prevent any further losses.
What is the Open High Open Low Strategy?
The open high open low strategy involves buying, shorting, or selling the stock after comparing the open, high and low of a stock.
If the open and low are equal, it is called an open low and a buy signal is generated for purchasing the stock. On the other hand, if the high and open are equal, it is called an open high. In this case, a sell signal is generated for the stock.
An important feature of open high open low strategy success rate is the selection of stocks. All stocks will not be very susceptible to this strategy and will not be able to utilize their full potential of it.
It is imperative that proper research be conducted to select the proper stocks for this strategy, after which the said stocks should be kept under close supervision to hunt for any opportunities that provide the desired chance.
Data analytics are quite useful and necessary for an open high open low strategy. This is because you will need to carefully predict whether the price of a certain stock will go up or down in the coming day so that you can invest accordingly.
It is worth noting that since you only need to predict the next day, the time needed for data analysis is particularly short and not very consuming.
Risk and Reward
The greatest advantage of this strategy is the fact that the risk associated with it is very low. It is because of this huge open high low strategy success rate, that it is opted by old and new investors alike.
The risk factor is less and on top of that, the rewards gained through this method are very high. While the optimal risk-to-reward ratio preferred by investors is 1:2, this strategy is a good way to reach very similar odds through intraday trading.
Since the time period in between trades is very low (a maximum of 1 day), it is very difficult to create noticeable profits through a few shares. Say you trade 5 shares in one day of trading, and each share brings you a profit of ₹1000. This brings your total profit to ₹5000. Now on the other side, assume that you did the same thing with 100 shares. Now your total profit is ₹5,00,000. Hence, the volume of stock plays an important role when using this strategy.
Successful execution depends on the careful carrying out of the steps involved in the process. Therefore after selection of the best stocks for your requirement, buckle up for the open high low strategy.
- First, login into your trading account and ensure you have the required funds for pulling off the strategy.
- Prepare a list of stock watchlists for the day. The list should be ready maximum by 9:00 AM.
- While creating the watch-list, do make a point of noting the highs, lows, and pivot points of the previous day.
- Wait until 9:45 AM and see how the prices are moving according to your evaluations and predictions.
- At 9:45, if an open low situation exists, purchase stocks according to your capability and continue monitoring the situation. Appoint a stop loss at the current trading day’s low price.
- Hold the stocks till the end of the day or till the stop loss is reached.
- Alternatively, if you predict the prices will go down, you can plan to short the stock as well.
- In this strategy, if the prices drop and an open low situation is seen, you can short the stock, keeping the stop loss at the current day’s high price.
- Continue to short the stock till the current trading day ends or you reach your stop loss.
Impact of the strategy
The open high low close trading strategy greatly impacts the stock market. This is because the primary setup is in the first few minutes of the market, and that is when the trading business is the busiest.
If the low and open have the same value, there is a clear indication that there is greater demand in the market than the currently available supply. This insinuates that the price of the stock will rise further in the coming time, which benefits the strategy even more.
Similarly, if the high and open have the same value, it implies that there is greater supply in the market than the existing demand for the stock. Hence, the price will further decrease in the short future.
In this way, the strategy can impact the functioning of the market and the prices of the various stocks involved.
The stock market is a ripe fruit waiting to be picked, i.e., it has untapped potential that is waiting to be tapped by the various investors of the world.
It is the need of the hour right now that willing investors find the right paths and means to get into the market and harvest its fruits. It is possible only through the proper strategies, that this can be achieved.
With strategies similar to open high low new traders would be willing to venture into this new playfield, as they would find these methods convenient, understandable, and worthy of turning in large profits.