Written by Trader Shane on November 5th, 2010
Opening Only Orders Strategy
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In day trading, there are a handful of tried and true strategies that consistently produce results. You could say that they are a day trader’s bread and butter. Today, we will discuss one specific strategy that has been proven successful day in and day out.
The Opening Only Orders strategy is a “fade-the-gap” strategy. It is designed to get you on the same side of the market as the NYSE specialist. What you are looking for is an over-reaction of buyers or sellers in the overnight market. This over-reaction gives you an opportunity to get in and take advantage of the correction or reversion to the correct price. This is a quick move and you have to be nimble to take advantage of it. But with some practice and diligence, anyone can learn it.
In case you are unfamiliar with the term, “fading the gap” means that if the price moves significantly from the close yesterday, but before the open today, there will be a gap in prices. The first move on the opening is usually in the direction of where the close was yesterday. The reason price has a tendency to head in the direction of the previous day’s close is due to the imbalance of buy or sell orders from the overnight session. For example, if a pharmaceutical company announces overnight that the next miracle drug has received FDA approval, buyers will clamor to purchase the company’s shares and there will be a huge imbalance of buyers over sellers. NYSE specialists are legally required to “balance” or accommodate these orders and cannot take part in the move themselves. Once the market makers and NYSE specialist have balanced these orders, they can switch to whichever side they want and become a buyer or a seller. While the imbalance is there, however, they have to be “the buyer or seller of last resort.” So, it is in the market makers and NYSE specialists’ interest that the market retraces slightly (goes in the opposite direction of the gap) to get them out of their positions with a profit, or at the least minimal losses. Hence, the tendency to revert to the prior days close.
What matters to you is how you can take advantage of this phenomenon. The Opening Only Orders strategy’s edge comes from getting you positioned on the same side of the market as the NYSE specialist and market makers. It is like having a whale of an investor, with the same goal as you behind your orders!
What you need to know is, what the imbalance is for a specific stock so you can place your orders in the opposite direction of this gap up or down. The easy way is to subscribe to a data feed and look-up/sort your specific stocks by size of the imbalance. For a fee, the NYSE publishes this information through the “NYSE Order Imbalances Data Feed” as follows:
- Every 5 minutes between 8:30am EST and 9:00am EST
- Every 1 minute between 9:00am EST and 9:20am EST
- Every 15 seconds between 9:20am EST and the opening
- Shows continuous Book Clearing publication 2 minutes prior to the open at approximately 9:28am.
If you can afford this data feed, the strategy is quite simple. First, sort by the size of the imbalance in your group of stocks to find the largest imbalance. Second, ensure there is no breaking news that justifies the imbalance. You are looking for over-reactions, not rocket ships. Examples of major news to be weary of (i.e. news that you DO NOT want to be fading) are SEC investigations, cures for major diseases, criminal accounting practices, etc.. These are not normal occurrences and the imbalance may be justified. Third, once you have determined that the order imbalance is most likely just an over reaction, place a Market-On-Open order (these cancel automatically if you are not filled at the opening print) in the opposite direction of the imbalance. If you get filled, 75% of the time the market will move in your favor quickly. You will have to decide what you want your stop loss and profit target to be based on the average volatility of your particular stock and experience. Remember this is strictly a day trade. You want to make sure that you are out before the NYSE specialist has balanced their book and takes the stock back in the original direction. Most of the time, you will be out within 10 to 15 minutes, sometimes sooner.
If you cannot afford the data feed, luckily, there is a workaround to simulate what you think the price of the stock should be. The e-mini’s open one hour before NYSE. The S&P 500 mini futures give a good indication of where the market should be. Using the futures, you can determine on a percentage basis where you think your stock should open. For example, if the S&P 500 is opening up 1% higher, the stock should open around 1% higher also. Once you calculate where your stock should open (some people call this fair value), place a market-on-open buy order .5%-1.5% below the fair value price and a market-on-open sell order .5%-1.5% above the fair value price. Adjust the .5%-1.5% based on the individual stock you are trading, market volatility, and personal experience. Also, make sure to place both the buy and sell order (i.e. envelope the market), you’ll be surprised at how many fills you get on the opposite side of what you were expecting. If you get filled, look for a quick move in your direction and exit before it turns and goes against you.
Tips:
- Make sure there is no breaking news affecting the stock.
- Make sure you can enter a short and a buy for the same stock at the same time. (some brokers do not allow this).
- Make sure to diversify sectors (you don’t want to enter too many positions in the same direction if they go against you).
- is strategy requires a lot of margin since you are placing orders on both sides of the market for many stocks.
- If you have an extreme gap one way, look for the move to continue in the wrong direction to shake out the weak players.
With a little practice and discipline, the Opening Only Orders strategy can become a significant weapon in your day trading arsenal.
4 Comments at "Opening Only Orders Strategy"
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nice post. thanks.
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