Example: Trading ABC industries
Let us consider ABC Industries Ltd., one of the prominent stocks listed on the National Stock Exchange (NSE) of India.
Step-by-step implementation
Here is step by step implementation of OHOL trading strategy-
1. Market opening:
- Assume that the market opens at 9:15 AM IST.
- On a particular trading day, Reliance Industries opens at Rs. 2,300, which also happens to be its highest price of the day so far.
2. Identifying the pattern:
- By 9:20 AM, it is evident that Rs. 2,300 is the highest price the stock has reached since the market opened.
- The stock price starts to decline slightly, confirming that the opening price might indeed be the high for the day.
3. Making the trade:
- According to the OHOL strategy, a trader might decide to sell short Reliance Industries at Rs. 2,295, anticipating a further decline in the stock price.
- The trader sets a stop-loss order at Rs. 2,305 to limit potential losses if the stock price reverses and starts to rise.
4. Monitoring the trade:
- Throughout the day, the trader monitors the stock’s price movements.
- By 3:00 PM, the stock has fallen to Rs. 2,250.
5. Closing the trade:
- The trader decides to close the short position at Rs. 2,250, locking in a profit.
- The profit per share is Rs. 45 (Rs. 2,295 - Rs. 2,250).
Key considerations
- Risk management: Using stop-loss orders is crucial to mitigate potential losses. In this example, the stop-loss was set at Rs. 2,305.
- Market volatility: The OHOL strategy can be particularly effective in a volatile market where price movements are more pronounced.
- Timely decision making: Since this is an intraday strategy, decisions must be made swiftly based on the early price action.
Features of open high open low strategy
The Open High Open Low (OHOL) strategy is characterised by several key features that make it attractive to intraday traders in the stock market. Here are the prominent features:
1. Intraday focus:
OHOL strategy is specifically designed for intraday trading, where positions are opened and closed within the same trading day. Traders aim to capitalise on short-term price movements observed immediately after the market opens.
2. Simple criteria:
The strategy revolves around identifying stocks that either open at their highest price of the day (Open High) or lowest price of the day (Open Low). These price levels serve as crucial signals for potential future price movements.
3. Volatility utilisation:
It thrives in volatile market conditions. Stocks that exhibit significant price movements early in the trading session provide traders with opportunities to enter positions based on expected continuation or reversal patterns.
4. Quick decision making:
Successful implementation of OHOL requires rapid decision-making capabilities. Traders must assess price action shortly after market open and execute trades promptly to maximise potential gains or limit losses.
5. Risk management:
Like any trading strategy, effective risk management is paramount in OHOL. Traders often use stop-loss orders to mitigate losses if the anticipated price movement does not materialise as expected.
6. Flexibility:
While traditionally applied to individual stocks, the OHOL strategy can also be adapted for trading indices or other financial instruments with liquid markets and clear price patterns at the opening bell.
Working of an open high open low strategy
The Open High Open Low (OHOL) strategy operates on a straightforward principle of identifying and trading based on price patterns observed immediately after the market opens. Here’s a detailed explanation of how this strategy works:
1. Market open:
At the beginning of a trading day, stocks begin trading at their respective opening prices, which are crucial data points for the OHOL strategy.
2. Identifying highs and lows:
Traders monitor the initial price movements closely. If a stock opens at its highest price of the day, it triggers the "Open High" condition. Conversely, if it opens at its lowest price of the day, it triggers the "Open Low" condition.
3. Entry points:
For the "Open High" scenario, traders may consider entering short positions, anticipating a potential decline from the peak price as profit-taking or bearish sentiment emerges. Conversely, for the "Open Low" scenario, traders may consider entering long positions, expecting a bounce back from the low point as buying interest or bullish sentiment strengthens.
4. Setting targets and stop-losses:
Traders establish profit targets based on expected price movements and set stop-loss orders to manage risk. These measures are crucial to protect capital in case the market moves against their initial assessment.
5. Execution:
Trades are executed swiftly to capitalise on the anticipated price movements. Since the strategy relies on early price action, decisions must be made promptly to maximise potential gains and minimise losses.
6. Monitoring and adjustment:
Throughout the trading session, traders continue to monitor the stock's price behaviour. They may adjust their strategy or exit positions if the market conditions deviate from their initial expectations.
7. Closing positions:
Ideally, positions are closed before the end of the trading day to avoid overnight risks and to realise intraday profits or limit intraday losses.
How to execute the OHOL strategy?
Let us understand the execution of the OHOL trading strategy in simple steps:
Step I: Identify open price
- Determine the opening price of the stock.
- This is the price at which the first trade of the day occurs.
Step II: Analyse OHOL conditions
- If the opening price is equal to the low of the day, it triggers a buy signal.
- Conversely, if the opening price matches the high of the day, it triggers a sell signal.
Step III: Execute trades
- Buy the stock when the OHOL conditions indicate a buy signal and sell when you get a sell signal.
- Remember that OHOL trades are executed on the same day.
Step IV: Close positions by the end of the trading day
- Ensure all positions are closed by the end of the trading day.
- This means no stock balances are maintained overnight.
5 best tips to optimise OHOL strategy execution
To optimise the execution of the Open High Open Low (OHOL) trading strategy, consider the following tips:
1. Pre-market analysis
- Conduct thorough pre-market analysis to identify potential candidates for the OHOL strategy.
- Look for stocks:
- Having significant pre-market price movements, or
- Which react strongly to news or events
2. Volatility assessment
- Assess the volatility of the stocks you are considering.
- As per a general rule of thumb, higher volatility can provide more trading opportunities but also increases risk.
- Choose stocks with manageable volatility levels based on your risk tolerance.
3. Set clear entry and exit criteria
- Define clear entry and exit criteria based on OHOL conditions.
- Determine the exact price points at which you will enter and exit trades.
- This pre-determination will help you avoid indecision during trading hours.
4. Manage risk with stop-loss orders
- Utilise stop-loss orders to manage risk and protect your capital.
- You can determine appropriate stop-loss levels based on:
- Market volatility
- Support/resistance levels, or
- Technical indicators
5. Maintain your trading psychology
- Human emotions, like fear, greed, and overconfidence, can severely impact the execution of OHOL strategy.
- Thus, stay disciplined and practice self-awareness.
- Stick to your trading plan to prevent impulsive decisions.
- Additionally, consider implementing techniques such as:
- Mindfulness
- Meditation, or
- Journaling
Essential considerations before opting for open high open low strategy
Before implementing the Open High Open Low (OHOL) strategy in intraday trading, several essential considerations must be taken into account:
- High trading volume: Choose shares with high trading volume. High-volume stocks provide greater liquidity and enhance trader confidence.
- Candlestick pattern confirmation: Only consider a trade if the closing price of the first candle is lower than that of the second candle. This confirms the potential direction of the price movement.
- Risk-reward ratio: Ensure a minimum risk-reward ratio, with 1:2 being the optimal choice according to experts. This ensures that potential profits outweigh potential losses, providing a favourable risk-reward balance.
- Stop loss placement: Set the immediate support level as your stop loss and use the immediate resistance level as your target. This helps in managing risk effectively by limiting potential losses while aiming for profitable trades.
- Range breakout: Consider entering long or short positions after a range breakout. Breakouts from consolidation phases often signal the beginning of significant price movements, offering lucrative trading opportunities.
How can OHOL strategy determine the type of trading session?
The OHOL strategy can provide insights into the type of trading session based on early market dynamics and price patterns. Here’s how it works:
- Market opening volume: Typically, trading volume is high in the first 15 minutes of the market open, leading to increased trading opportunities. This high volume results in greater price range expansion, creating favourable conditions for intraday trading.
- Price and demand/supply dynamics: If the opening price of a stock is the same as its low of the day, it indicates excess demand in the market. This often leads to higher stock prices as buyers outnumber sellers. Conversely, if the opening price is the same as the high of the day, it suggests excess supply, leading to lower stock prices as sellers outnumber buyers.
- Emphasis on opening session: Intraday traders focusing on the OHOL strategy should pay close attention to the opening trading session. This period offers high potential for maximising returns, as early price movements can set the tone for the rest of the trading day. By analysing price action and volume during this crucial period, traders can make informed decisions and seize profitable opportunities.
Understanding these dynamics allows traders to interpret market sentiment and adjust their trading strategies, accordingly, enhancing the effectiveness of the OHOL strategy in navigating different types of trading sessions.
Conclusion
The Open High Open Low (OHOL) trading strategy allows traders to capitalise on intraday price movements by buying a stock when its opening price equals the low of the day and selling it when the opening price matches the high of the day.
Through pre-market analysis, volatility assessment, and setting clear entry and exit criteria, traders can perfectly execute this strategy and enjoy profitable trades. With an approximate success rate of 80% when applied to liquid stocks and commodities, the OHOL strategy presents a compelling opportunity for intraday traders to generate profits. Also, you can use advanced order types like cover order and bracket order to further enhance its efficiency.
Also read
Different Types Of Stock Trading
What is Online Trading
What is the Timing for Intraday Trading
What Is Crude Oil Trading?
What is Spread Trading
