An Easy Way to Spot Dominant Trends
01/02/2012 8:00 am EST
Simply by examining opening price signals (OPS), traders can quickly identify the trend for a particular security and determine whether to trade it long or short for the highest-probability profits.
I recently received an e-mail from a student asking me to review the opening price signal (OPS). This is something that can assist most traders who are struggling in finding the dominant trend of the day. Many new traders feel they need to make as many trades as they can in order to be successful. This couldn't be further from the truth. In fact, trading is all about finding the trades with the highest probability of success.
Newer traders often try to trade the same stock in both long and short directions in the same trading day. Only one direction will have the higher probability for success, as it is the dominant trend direction. The other trades are countertrend and offer higher risk with lower chances of success. Countertrend trades are not necessarily bad; they should only be taken under certain circumstances, though.
In the professional trader course, we focus on identifying the impulsive and corrective environments in our securities. We want to trade in the direction of the impulse, and therefore, will have the markets move in our favor further and faster. Trading in the direction of the correction could be profitable for an experienced trader, but beginners will take losses as the market shifts rapidly back to the impulse.
The opening price signal is simple. Look at the current price for your stock and see if it is higher or lower than the first trade (opening price) of the day. If the current price is higher than $0.25 above the opening price, then the OPS is positive and you should be focused on taking long positions only, as they will have a higher probability of success.
If the current price is lower than the opening price by at least $0.25, then you have a negative OPS and should focus on good short entries for high probability.
Let's look at an example:
Here we see that the Dow, S&P, and Nasdaq are all showing positive OPS. Individual stocks will often follow the direction of the broader markets. If the indexes are showing positive OPS, then we should focus on buying stocks that are also showing positive OPS. Trying to short weak stocks in this environment is likely to lead to more risk and smaller profits.
VirnetX Holding Corp (VHC) was fighting the market trend and offered less opportunity with more risk:
You should wait until after the two morning reversals to see the smoothed trends and to determine the OPS. If you are not sure of the reversal times, visit one of our centers and take the Professional Trader class, as this and many other trading necessities are discussed in detail. Remember, there is no prize for the person who makes the most trades.
You only make a profit by taking winning trades and minimizing your losses on the losers. Trade with high probabilities and you will increase your chances for success. Once you have more trading experience and platform experience, you may want to take countertrend trades, but is there really any reason to take the risk? Stick with the OPS for success!
By Brandon Wendell, instructor, Online Trading Academy