Published on: June 18, 2024
One commonly overlooked yet time-tested trading strategy is the Open=High (O=H) strategy. Despite being used for decades, this technique often escapes the attention of many traders.
Various candlestick patterns, such as Bearish Belt-Hold or Bearish Marubozu, are based on the O=H principle, but relying solely on Open=High can sometimes lack conviction.
To effectively utilise this strategy, looking for days when 10% of the Futures and Options (F&O) stocks exhibit the O=H pattern or when multiple sector indices or key benchmark indices fall under this setup is crucial. Understanding when to apply this strategy can significantly enhance your trading decisions and outcomes.
What is the Open=High Strategy?
The Open=High strategy is based on the observation that when a stock’s opening price equals its highest price of the day, it can signal a potential bearish trend reversal.
The pattern occurs because the stock could not move higher than its opening price, suggesting selling pressure and a potential for downward movement.
Scanning for Open=High Stocks
Definedge Securities offers a robust platform called RZone that allows traders to scan for stocks meeting the O=H criteria.
Here’s how you can check for these stocks using RZone after the first-hour candle closes:
1. Access RZone – Log into the Definedge Securities RZone platform.
2. Navigate to Scanners from the left panel: Go to the PRICE SCANNER and select CANDLESTICK SCANNER
3. Set Parameters: Input the condition as Open=High after the first hour of trading (Look-back Period = 1 if you are scanning post 10:15 am but before 11:15 am). Lastly, select the Group you want to scan and Click on SCAN.
The reason I choose F&O is because they are the most liquid for Longs and Shorts during the day.
4. Analyze Results: Review the list of stocks generated. Trade the stock with affordable stop-loss levels.
I count the number of stocks. As of 18th June 2024, we have 187 stocks in F&O, and if the stocks are over 20, it means that over 10% of the F&O stocks fall under Open=High, a bearish reversal pattern.
You can also export the list to Excel by clicking the “Export” button at the top of the table.
Broader Market Impact of Open=High Signals
When multiple stocks exhibit the O=H pattern, it can have significant implications for the broader market:
1. Market Sentiment: A prevalence of O=H stocks may indicate bearish sentiment, suggesting that investors are selling off at the opening bell.
2. Sector Analysis: If specific sectors show many O=H stocks, it may point to sector-specific issues or trends, such as adverse earnings reports or regulatory concerns.
3. Market Volatility: Increasing O=H signals across many stocks can lead to heightened market volatility as traders react to perceived selling pressure.
4. Trend Reversal: Persistent O=H patterns could indicate an impending market correction or reversal, prompting traders to adjust their strategies accordingly.
The Open=High strategy is valuable for traders looking to capitalise on bearish trends. Utilising platforms like RZone by Definedge Securities can streamline the process, making it easier to find and act on O=H signals.
