Custom Search

Open/Close Relationships

Yet another, and, I believe, more important relationship is that of the close versus the open. A market that closes higher than where it has opened is one that has likely been under accumulation for the day or for the given time frame. A market that closes lower than where it opened is one that is likely the subject of persistency selling. A consistent close below opens is considered bearish, while a consistent close above opens is considered bullish. A market that closes higher than where it opens and near the high of the day is one that I consider very bullish, and vice versa for a market that closes near its lows and below its open.

Figure 11-5 illustrates the close-greater-than-open relationship on a daily price chart. As you can see, closing above the opening is typical of bull trends. Figure 11-6 illustrates the opposite condition. Closing below the open is characteristic of bear trends. Although these two illustrations depict daily price charts, the same relationship is true on all time-frame levels. Figure 11-7 shows these relationships on an intraday chart.

Developing a Trading System on the Open versus Close Relationship

Knowing that such relationships are important and that they tend to precede rallies and declines, is there a way in which they may be used for day trading? Based on my work I feel that there is. The method that I have developed based on the open versus close/open relationships is called COR. Here is a synopsis of how it works.

ж Following x consecutive price bars where the close is greater than the open, a buy signal is triggered and a long position initiated on the opening of the next price bar.

ж Following x consecutive price bars where the close is less than the open, a sell signal is triggered and a short position initiated on the opening of the next price bar.

ж If there is a current position based on a previous signal, it is reversed and a profit or loss is taken.

ж An initial stop loss (money management stop) is used.

ж When a given profit amount has been reached (floor amount), then a trailing stop loss is used. The trailing stop loss is a given percentage of the open profit as measured from an open profit peak. In other words, the market must retrace gains from an open profit peak by a certain amount before the trade is stopped out.

ж If the stop is hit, the trade is closed out and no new position is entered until the next signal.

ж A profit is taken either by being stopped out or by exit on the nth profitable opening.

ж If neither of these conditions is met, then you exit on the close of the same day (MOC).

As you can see, this approach provides several alternatives, all ideally suited for the day trader. It provides all the necessary elements. When programmed on a daily live data feed, the software, such as Omega TradeStationЩ, will automatically generate the entry and exit points for you based on the input parameters.