Understand Open High Open Low Strategy - Meaning and Features

In the dynamic world of intraday trading, success hinges on implementing effective strategies that capitalize on market volatility. One such strategy that has gained traction among traders is the Open High Open Low (OHOL) strategy. So, what's this strategy and its features? Let's find out.

What is the Open High Open Low Trading Strategy?

The Open High Open Low (OHOL) strategy is a basic intraday trading method based on a stock’s opening price compared to its daily high and low. If the stock opens at the same price as the day’s low, it signals a buying opportunity—bullish sentiment may drive the price up. Conversely, if it opens at the same price as the day’s high, it suggests a selling or shorting opportunity—potential bearish pressure ahead. Traders typically act on these signals swiftly, often using stop losses and targets to manage risks and capture short-term movements.

Meaning of Open High Open Low Strategy

A relatively simple strategy, open high open low, activates a buy signal when the stock price matches its open and low values, while a sell signal is triggered when the open and high values align. It applies not only to individual stocks but also to trading in indices.

By accurately timing the markets, this approach aids in selecting the optimal sectors for investment or withdrawal. Consequently, it becomes a valuable tool for restructuring a trading portfolio to enhance overall profitability.

Example of Open High Open Low Strategy

Suppose you want to employ the open high open low strategy for trading a stock listed on the National Stock Exchange (NSE). The stock opens at INR 400 per share and experiences an early-session increase to INR 410. Recognising this as a bullish signal, you opt to go long by purchasing 100 shares at INR 410.

To mitigate potential losses, you place a stop loss order at INR 390, automatically closing the position if the stock drops to this price. Throughout the day, you actively monitor the stock’s movements, searching for indications that the bullish trend might be concluding.

Later in the day, the stock climbs to INR 420, prompting you to close the position by selling the 100 shares at this price. This action yields a profit of INR 1,000 (100 shares x INR 10 gain per share).

This strategy is straightforward, with the buy signal triggered when the stock price equals both its open and low values. Conversely, the sell signal activates when the open and high values of the stock are identical. This approach is not limited to individual stocks and can also be applied to trading indices. It aids in selecting the appropriate sectors for investment or withdrawal based on precise market timing. Consequently, this strategy proves valuable in optimising the trading portfolio for maximum profitability.

Features of Open High Open Low Strategy

Here are some features of open high open low strategy:

Long-term Chart Analysis

In the OHL strategy, actively analyze long-term stock charts. Even though you're using an intraday trading method, avoiding trading against a stock's trend is prudent. Therefore, you must analyze the daily/weekly charts to ensure that your buying or selling decisions align with a stock's trend.

High Risk-reward Ratio

In intraday trading using the OHL strategy, you typically face a high risk-reward ratio. You set your 'stop loss' near the strike price, usually at the low of the opening 15-minute candlestick, especially when the opening price of a stock is lower.

Scanner Usage to Evaluate a Stock's Trend

Choose the open high low strategy to assess a stock's trend with precision and make investment decisions efficiently. Put specific stocks on your watchlist and decide when to invest in them, allowing you to select the best sector for investing your funds.

Working of a Open High Open Low Strategy

Here's the working mechanism of the open high open low strategy:

• When a company's shares consistently trade within a specific range for more than one session, you should consider the breakout from this range as a decisive point following a sideways trading session.

• In the first trading session of the day, opt for a stock with a low opening. Based on your analysis, evaluate the index and decide to enter a long position. Monitor the gradual increase in trading volume to confirm your long call.

• The final scenario involves the company's shares trading in a robust demand/supply zone. The demand zone signifies the price range from which shares recover, while the supply zone indicates the range causing a stock's price to fall due to excess market supply.

How to Execute the OHOL Strategy?

Here is the step guide to execute the OHOL strategy:

• Step 1: Begin by scanning for a stock showing strong upward momentum during the trading session. Look for high volume and a clear bullish trend on intraday charts.
• Step 2: Once the market opens, note the stock’s lowest price of the day (day’s low). This is your reference point for the OHOL strategy.
• Step 3: Watch the price action. The entry signal comes when the stock price breaks above the day’s high after previously touching the day’s low. This indicates strong buying interest.
• Step 4: Ensure the breakout happens with higher-than-average volume, confirming the strength of the move and reducing the risk of a false breakout.
• Step 5: Place a buy order immediately after confirmation.
• Step 6: Keep a strict stop loss just below the day’s low to manage risk effectively.
• Step 7: Target quick profits, as OHOL works best for intraday scalping. Exit when momentum slows or your target is hit.

Things to Keep in Mind Before Opting for the OHOL Strategy

Before using the OHOL strategy, keep the following pointers in mind:

• The OHOL strategy is highly dependent on volatility during the first trading hour. Applying it on a day when the market is sluggish or trading within a narrow range will reduce its effectiveness.
• Not all stocks or indices respond well to the OHOL method. It works best on assets that show consistent liquidity and volume, allowing for meaningful movement once the first-hour level is breached.
• Before risking your capital, you must backtest the OHOL strategy on historical data. This involves identifying the first-hour high or low for several past trading days and observing the price behaviour after that point is crossed.
• The OHOL strategy can be highly sensitive to scheduled announcements such as interest rate decisions, company earnings, or economic data releases. These events can cause sudden price spikes that temporarily break the OHOL level but quickly reverse, trapping traders.
• The OHOL breakout can sometimes lead to large moves, but assuming that will happen every time is risky. You must base your targets on a historical performance of the stock or index after breaking the OHOL level. This means considering average breakout distance, current market sentiment, and resistance or support levels ahead.
• If the OHOL level is tested repeatedly without a clear breakout, it may indicate weakening momentum or strong opposition from market participants. Multiple failed breakout attempts increase the likelihood of a reversal rather than the continuation.

Essential Considerations Before Opting for Open High Open Low Strategy

There are certain things to consider before opting for this strategy. You need to consider:

• Opt for shares with high trading volume. High-volume stocks enhance your confidence as a trader.
• Consider a trade only if the closing price of the first candle is lower than that of the second candle.
• Ensure a minimum risk-reward ratio, with 1:2 being the optimal choice, according to experts.
• Set the immediate support level as your stop loss and keep immediate resistance as you stop loss
• Consider entering long or short positions after a range breakout.

To Sum Up

Recognizing the practicality of this strategy, you can effortlessly withdraw or invest money when stocks are low, or buy when they're high. Once you've applied an open high low trading approach to your advantage, you can choose to exit your purchases either by the close of the business day or following your preset stop loss.