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Construction of the O/C for Intraday Trading

The O/C is constructed as follows:

1. Use two smoothed moving averages (MAs) as follows:

a. A smoothed moving average of the opening prices consisting of 6 to 10 periods on 5-, 10-, 15-, or 20-minute data.

b. A second smoothed moving average which consists of closing prices of 12 to 24 periods on 5-, 10-, 15-, or 20-minute data.

2. Buy and sell on crossovers of the two MA lines. When the MA of the close crosses over the MA of the open, a buy is signaled, and when the MA of the close falls below the MA of the open, a sell is signaled.

3. You will need to adjust the lengths used as a function of the time span you are using (i.e., 5-, 10-, 15-, or 20-minute data) and the volatility of the market you are following. There are no hard and fast rules for doing this. You will need to use your judgment; however, after you work with this method for a while, you will become quite adept at making the proper selections. (Formula for smoothed MA is in appendix at end of book.)

An important issue which you will need to deal with is the amount of the crossover. In other words, you will need to determine how much of a crossover will be sufficient to generate a signal in either direcВэtion. In this respect consider Figure 13-6. As you can see, the minor crossovers, which do occur, are not reliable. They must be sufficiently large. You will need to determine the crossover amount or threshold. You can do this fairly easily be examining recent signals. Be sure to monitor the O/C performance closely.

You may use O/C signals in the opposite direction to reverse posiВэtions, or you may use a trailing stop loss to exit prior to a reversing signal. Some subjective decisions may be necessary in exiting trades which are initiated using O/C signals, but I stress that this is not a totally mechanical system. It does require decisions. It is, however, one of the most sensitive methods I know for trading volatile markets such as S&P and the currencies. It has also worked well in other marВэkets. Naturally, you will want to be out of all trades by the end of the day, and you will wait for the next day to enter on new signals.