Last Updated on May 25, 2022 by Neera Bhardwaj
Intraday trading is considered to be a skill and is not everyone’s cup of tea. For a trader, not losing the capital amount is more important than doubling the capital. Because till the time you have capital, you have a chance to cover any of your losses. But once you lose the capital, you will be at no place to gain the capital back. Therefore, to earn from intraday trading, you need to master specific trading techniques that suit your style. Also, a successful trader generally would not mix trading techniques; they always stick to one trading technique and master it. In this article, we will talk about one such trading technique, which you can use while intraday trading in the market. It is called the open high low strategy.
Table of Contents
What is an open high low strategy?
The original name for this open high low strategy is ‘Open Dive.’ It is one of the more popular strategies for short targets. In this OHL strategy, a trader needs to look at the pre-market levels. Along with that, previous days’ opening and closing levels are also important. Traders take a buy call when the index and stock both have the same open and low level. Whereas, if the stock and index have the same open and high level, a sell signal is generated.
The traders need to book profit soon and get out of the position once the target is achieved. The stop loss level is also near the strike price.
Features of open high low strategy
OHL strategy is the only intraday trading strategy for which you have to analyze the long-term chart. Although it is an intraday trading strategy, still, a trader should ideally not trade against the trend. Therefore, it is important to analyze the weekly or daily chart also to ensure trend-based trade.
The risk-reward ratio is generally high as the stop loss set by the trader is near the strike price in the OHL strategy. Generally, when the open is higher, the stop loss is the low of the opening 15-minute candlestick. On the other hand, when the open is lower, the stop loss is the low of the first 15-minute candlestick.
You may use a scanner to evaluate the trend of the desired stocks with greater precision that helps to decide when and how to invest. You can put these stocks on your watchlist and trade accordingly. The strategy is applied to trades in Nifty scripts that help to select the best industry to invest in.
Working of open high low strategy
There are three different ranges where the open high low strategy can work.
- The first is if the stock is trading in a particular range for a couple of trading sessions. Then the breakout or down from the range is a decisive point after a sideways trading session.
- The second is during the opening of the trading session. In this scenario, you have to select the stock that is opening low, and then by looking at the index, you can go long on the stock. Also, you can check if the volume in the stock is gradually increasing; then, you may get a confirmation for your long call.
- And the last range is when the stock is trading in a strong demand or supply zone. The demand zone is where the stock always bounces back from, and the supply zone is a price range from which the price always drops down because of the oversupply.
Once you have analyzed stocks in this range, you can add them to your watchlist. And during the pre-market hours, you can look at the market volatility of every index and then decide your strategy for the rest of the day. Generally, for intraday, traders trade on the stocks of the index, which is on average up in the morning session. It increases the volatility in the stock, which makes it easier for them to trade.Trading strategy for the rest of the day can be determined when you look at the market volatility of every index during the pre-market hours. Click To Tweet
Who should invest in open high low strategy?
Open high low strategy is a suitable option for intraday traders. Intraday traders choose one trading technique from all the options available and then master that technique. It is the only way successful traders make more profitable trades and reduce the number of losses.
For intraday traders, this is the best scalping technique as they can trade on either side, buy or sell, and attempt to make a profit. It becomes easy to make a profit over time with practice.
Rules for open high low strategy
- For OHLS traders, it may be best to take trade positions after a range breakout.
- Traders should trade only in those stocks that have high volume. Stocks with high volume generally increase the confidence of the trader and also increase the volatility of the stock.
- Traders could consider taking the trade after the first candle closes lower than the second candle.
- The risk-reward ratio should ideally be a minimum. 1:2 is generally considered optimal. For taking the long call, the immediate support level should be kept as the stop loss. Alternatively, immediate resistance would stop loss in case of a short position.
- Lastly, for a short position, the price should be below the volume-weighted average price.
Execution of open high low strategy
Along with capital, you also need a foolproof plan and strategy to make a profit by intraday trading. Both of these are equally important for the traders. Therefore, a trader may have to sit a night before and plan the strategy for the next day.
This is how the execution of open high low strategy takes place:
- Once you have logged in to your trading account, add the desired stocks to your watchlist for the day. Also, you can do your homework, make a list of stocks the night before, and then add them to your watchlist.
- By using the scanner and your observation, analyze the trend of the stock.
- Once the trend is analyzed, check the graphs and chart patterns of the stock. Many traders who are in space for a long time become familiar with the chart movement, so they can predict the price movement just by looking at the chart. However, it comes with a lot of practice, and it takes years of study.
- After the market opens, and if the price movement is as per your analysis, you can enter the position.
Advantages of open high low strategy
- It is one of the easiest trading techniques widely used by day traders. A beginner-level trader can also utilise it to increase the chances of profits.
- You do not need to analyze the charts in the market on a daily basis. You just need to focus on the market trend for the present day and trade accordingly.
How can OHL strategy determine the type of trading session?
The volumes are huge during the first 15 minutes of the trading session. And, then you can see high volume trading in the institutional zone. However, you can also witness high volumes throughout the trading session. That is considered a good opportunity for a trader.
Moreover, if the opening price is lower and the first 15-minute candle rises above the previous day’s high, it indicates that the price is taking support of the demand zone, and the rest of the day is going to be a trending day. Also, the demand is overpowering the supply in the market. Therefore, for a trader, it is very important to track pre-market and global updates. The majority of the traders wake up early to prepare for their trade set-up before the morning bell.
The OHL strategy can be helpful in capturing opportunities from the market, that too in a very short amount of time. All you need to care about is the capital requirement; since the targets are small, the quantity is supposed to be high to earn high returns. One more thing traders need to focus on is the open high low strategy’s calculation. The risk-reward ratio should be decided as per the calculation, and accordingly, the stop loss and take profit targets should be placed.