Open High Open Low Trading: A Simple yet Effective Approach
Created on 21 Mar 2023
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Do you ever wonder how some investors profit from the stock market by trading securities for a day? Well, it's called intra-day trading, and it's not for the faint-hearted. This type of trading involves buying and selling securities on the same day to book profits. It's a high-risk, high-reward game that requires sound strategy. And that's where the open high-low trading strategy comes into play. This article will explore the ins and outs of this popular intra-day trading strategy and how you can potentially use it to boost your profits. So, fasten your seatbelt and prepare for an exciting journey into the world of open high-low trading.
Key Open High-Low Trading Terminologies
Let's first get a good grasp of some essential trading terminologies before delving into the Open High Low Strategy and its significance in the intraday trading market.
1. Open: The term "open" refers to the price at which the very first trade of a stock is made for the day. The open price is a crucial indicator of the stock's performance for the rest of the day. This value is significant as it reflects any information changes between the previous day's last trade and the last order placement before the market opens.
2. High and Low: "High" and "low" are indicators that reflect how well or poorly a stock is performing in the market. The high denotes a stock's highest price during a trading day. If data suggests the high can be surpassed, investors may consider buying more stock to maximise profits.
On the other hand, the low represents the lowest price that a stock reaches during the day. A steadily declining low indicates investors should sell their stock to minimise losses.
3. Stop Loss: A stop loss acts as a safety net in trading. It is a predetermined price below which investors are unwilling to hold their stock. For example, if an investor purchases a stock at ₹1,000 and sets a stop loss at ₹800, the stock will be automatically sold once it reaches the ₹800 mark, regardless of how high the price may have risen. The stop loss helps to prevent further losses.
What is the open high, open low strategy?
The Open High Low (OHL) strategy is a popular technique traders use in the stock market. It's a simple yet effective approach where a buying signal is generated when a stock's open price is the same as its low price. Conversely, a selling signal is generated when the open price is the same as the high price. The goal is to identify trends and patterns in the stock market and make trading decisions accordingly.
OHL trading is a form of intraday trading where all positions are balanced off before the market closes. This ensures no change in the ownership of shares due to trades. It's a game that requires knowledge and skills in finance, news analysis, and risk management.
The original name of the OHL strategy was open dive, which accurately reflects the risks and rewards involved. The approach used in the OHL strategy is to buy stocks when the open and low prices are the same and to sell stocks when the open and high prices are the same. While this technique can make you rich, it can also lead to losses if not executed properly.
However, the OHL strategy is not as simple as it sounds. The NIFTY 50 Index identifies the best sectors to invest in and pulls stocks out of the market at the right time. Some scanners help interpret stock prices with greater accuracy. The Open High Low Scan is a method used to process scripts that are open=high or open=low. You can use online calculators to find thresholds for buying or selling and filter out scripts suitable for intraday trading.
How does the open high open low strategy work?
The Open High Open Low (OHL) strategy is a simple trading strategy used in the financial markets, which involves taking a position based on the opening price of a security relative to its high or low price. This strategy is often used in day trading and can be applied to various financial instruments, including stocks, futures, and currencies.
The OHL strategy involves identifying the opening price of a security and then monitoring its movement in the early part of the trading session. If the price of the security breaks above its opening price, it is considered a bullish signal, and the trader may choose to go long or buy the security. On the other hand, if the price breaks below its opening price, it is considered a bearish signal, and the trader may choose to go short or sell the security.
In practice, OHL traders often set a stop-loss order to limit their potential losses if the trade does not favour them. Additionally, they may use technical indicators or other forms of analysis to confirm the signal provided by the OHL strategy and help identify potential entry and exit points.
An example of how the OHL strategy might work in the stock market
Let's say a trader wants to use the OHL strategy to trade Tata Motors, which is listed on the National Stock Exchange (NSE). The stock opens at ₹400 per share and rises to ₹410 in the early part of the trading session. The trader identifies this as a bullish signal and decides to go long on the stock by buying 100 shares at ₹410.
To limit potential losses, the trader sets a stop loss order at ₹390, meaning that if the stock falls to this price, its position will be automatically closed out. The trader also monitors the stock's movement throughout the day, looking for signs that the bullish trend may end.
Later in the day, the stock rises further to ₹420, and the trader decides to close out their position by selling their 100 shares at this price. This results in a profit of ₹1,000 (100 shares x Rs. 10 gain per share).
Overall, the OHL strategy can be useful for traders looking to take advantage of short-term price movements in the financial markets. However, like any trading strategy, it is important to understand the risks involved and have a solid plan to manage potential losses.
Features of Open High Low Strategy
Open high low is one among many strategies that traders employ. Features that set OHL apart from other trading strategies are:
Analysis of stock charts
One unique aspect of the OHL strategy is that traders are required to analyse long-term stock charts. As a result, traders must analyse the daily and weekly charts to ensure that they buy or sell shares based on the stock's movement. Even though this is an intraday trading technique, experts advise traders to avoid trading against a stock's trend.
The OHL strategy is typically associated with a high risk-reward ratio as traders set stop-loss orders near the strike price. Normally, when the opening price of a stock is lower, traders put the stop loss at the low of the opening 15-minute candlestick.
Scanners to evaluate a stock's movement
Traders using the OHL strategy can more precisely evaluate a stock's trend using scanners. This enables them to make investment decisions more efficiently. Traders can also create watchlists of certain stocks and decide when to invest. Consequently, they are better equipped to select the best sector for investing their funds.
Things to know before starting OHL Trading
Before jumping into Open High Low (OHL) trading, it's important to understand the market and develop a solid trading plan. This will help ensure that you make informed decisions and manage risk effectively. Here are three key things to keep in mind before starting OHL trading:
1. Firstly, it's crucial to have a good understanding of the market you'll be trading in. This involves studying market trends, tracking news updates, and monitoring other important indicators. It's also important to be aware of market volatility's risks and potential impacts.
2. Secondly, developing a well-thought-out trading plan that considers your personal goals and risk tolerance is essential. Your plan should outline your entry and exit strategies and stop loss and profit targets. With a clear plan, you can make rational trading decisions and avoid emotional impulses.
3. Finally, risk management is a critical aspect of any successful trading strategy. This involves limiting potential losses, such as setting stop-loss orders and managing position sizes. It's also important to continually assess and adjust your risk management strategy as market conditions change.
By keeping these three factors in mind and consistently improving your trading skills, you'll be well on your way to success in OHL trading.
Steps to execute the open high-low strategy
To be a successful intra-day trader, it takes discipline and a solid strategy. Blindly jumping into trades may work a few times, but having a well-planned approach and a keen eye on the market is crucial to earn substantial profits. Here are the steps to execute an Open High Low (OHL) strategy:
- Log in to your trading account using your credentials and ensure you have enough balance.
- Create a watchlist of potential stocks to trade by surveying different options on your broker's app or website.
- Prepare a watchlist of stocks by 9:15 am to have sufficient time before the Indian stock market opens.
- Note the previous day's open, low, high, and pivot levels for your selected stocks, which can be easily obtained on your broker's platform.
- Keep an eye on the movement of the selected stock prices, which can be based on industry news or open interest in derivative securities. This can be done using analytical charts to record changes.
- At 9:45 am, when the market opens, wait for the price to cross the previous day's high or low. Enter short if the opening price and the day's high are equal. After the record is broken, check if the value of the stock is the same as open and low or open and high. If it's open and low, you can consider taking a long position and set the stop loss at the current trading day's low price.
- Exit the trade once you establish your intraday OHL strategy. This can be done at the agreed-upon stop loss or the end of the trading day.
By following these steps, you can execute a successful OHL strategy and increase your chances of earning profits in the stock market.
Dos and Don'ts of open high open low trading strategy
Open High Low trading strategy can effectively earn quick profits in the stock market. Still, it's important to approach it with discipline and caution. To help you navigate this trading strategy, here are some dos and don'ts of OHL trading, along with tips for success:
Dos of OHL Trading:
1. Do your research: Before jumping into OHL trading, take the time to research the stocks you're interested in and the market trends. This will help you make more informed trading decisions.
2. Set realistic goals: Don't expect to become a millionaire overnight with OHL trading. Set realistic goals for yourself and be patient.
3. Keep a trading journal: Record your trades, including their reasons and outcomes. This will help you identify patterns and improve your trading strategy over time.
4. Use stop-loss orders: Set a stop-loss order to automatically sell your shares if the stock price drops below a certain level. This can help limit your losses.
Don'ts of OHL Trading:
1. Don't trade based on emotions: Avoid making trades based on fear or greed. Stick to your trading plan and strategy.
2. Don't overtrade: Avoid making too many trades in a short period. This can increase your risk and lead to poor decision-making.
3. Don't ignore the market trends: Keep an eye on the trends and news that could impact your trades. Ignoring them can lead to unexpected losses.
Tips for Successful OHL Trading:
1. Start small: Don't invest a large amount of money in OHL trading right away. Start with a small amount and gradually increase it as you gain more experience.
2. Be disciplined: Stick to your trading plan and strategy, even if you encounter some losses.
3. Practice patience: OHL trading requires patience and discipline. Don't get discouraged if you don't see immediate results.
Following these dos and don'ts and tips can increase your chances of success with OHL trading.
The Bottom Line
So, there you have it, folks, the open-high-low strategy explained in a nutshell. As with any investment strategy, it's important to do your due diligence and research thoroughly before putting your money on the line. But with discipline, patience, and a good understanding of market trends, you can certainly make the most of this strategy and potentially reap significant rewards.
Whether you're a seasoned trader or a beginner, the open high-low strategy can be a valuable tool in your trading arsenal. Just remember, as with any form of trading, it's important to always stay on top of the market's news and developments and be prepared to adapt your strategy if necessary. Happy trading!
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