Trading strategie: Open Trade
Open Trade is a fairly simple strategy. The strategy determines its trade entry and exit points on the basis of price levels reached during the first market hour. Numerous authors such as Raschke, Monmoine ... develop trading strategies based on the same concept in their books.
The Open Trade strategy can be applied in the morning after the European markets have opened and again in the afternoon after the US markets have opened. The strategy thus allows either one or two trades per day per index. Open positions are always closed the same day. Positions are never kept overnight.
|Suitable for||: Market indices (FTSE, CAC, DAX ...)|
|Instruments||: Futures and CFDs|
|Trading type||: Day trading|
|Trading tempo||: Low - 1 or 2 trades per day|
The strategy in detail
When to open a position?
The price movement during the first hour can be an indication of the market’s strength or lack thereof. Significant are the highest and lowest price levels reached during the first 40 minutes. The highest and lowest price result in a price range. The price range from 9h00 to 9h40 is key for those market indices which start trading at 9h00. When the market breaks out of its price range traders open a position. Positions are either opened manually or automated. The trader can modify the time range and select how he will be notified. He can choose between MessageBox, PlaySound and SendEmail alerts.
This example shows two thin lines (green and red) following the market price for the first 40 minutes. At 9h40 the highest and lowest prices become the entry level for a potential trade. They are represented by the thick red and green lines. In this example the market price breaks through the green line first (at about 12h40). This is a buy signal. A position is bought.
When to close a position?
The Open Trade strategy relies on a price target and a stop. Price target and stop are placed at the same distance from the entry point. Professional investors often calculate these exit points as a statistically significant multiple of the ATR (average true range). The ATR reflects the intrinsic volatility of a financial instrument. Each financial instrument has a different ATR. The ATR is not constant, it evolves over time. The exit points are calculated basis on a multiple of the ATR and are automatically displayed in the trading platform.
Targets and stops are indicated by the thin green and light red lines above and below the entry price line. In this particular example a position was bought when the market price hit the buy level. Some time later the market price reached the target line and the position was closed with a profit.
In this example the market price hits the buy level. A position was opened. The market does not continue to rise but goes down and the stop is hit. This position is closed with a loss.
Attention. About 10% of the time an open position will neither reach its target nor its stop. The market is directionless and stays within the range. In this case an open position is closed at the market price at 13h00 precisely.
Applying the strategy in the afternoon?
The Open Trade strategy can be applied a second time in the afternoon after the US markets open. The opening of the US markets will often lead to increased volatility in the European markets. It is not rare for the European markets to change their trend after the US markets open.
The Open Trade strategy is clearly a day trading strategy. Numerous books on trading explore similar strategies based on price levels reached during the first market hour. The strategy is suitable for market indices and can be applied twice a day. Once after the European markets open and once after the US markets open.