Hundreds of thousands of stock traders swear by the OHL strategy for day trading. This trading guide will teach you everything you need to know about the OHL trading strategy and how to manage the OHL trades to maximize your trading profits.
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To become the best day trader, it’s important to trade with a directional bias in mind. Trading in one direction of the market will eliminate second-guessing yourself all the time. Developing a consistent trading strategy will be key to your long-term success.
Many studies have shown that the intraday high or low of the day is made within the first 15-minutes of the day. This is also when daily trading volume is the highest. Other researches show that it’s within the first 5 minutes of the day. This should not come as a surprise especially if you’re a day trader because you can see this sort of price action all the time.
The open high low strategy will help you take advantage of this price behavior.
Let’s start by answering the question, what is open high low strategy?
What is Open High Low Strategy?
The Open High Low trading strategy is a popular day trading strategy used by stock traders. Potential OHL trading signals are generated when the opening price has the same value as the highest price for that particular trading day or when the opening price has the same value as the lowest price for that particular trading day.
The OHL trade rules can be summarized as the buy or sell signal:
- Buy signal – when the stock has the same value for open and low.
- Sell signal – when the stock has the same value for open and high.
In other words, the open high low formula is:
- Open=Low (buy).
- Open=High (sell).
During the first minutes that the stock market is open (at 9:30 AM EST), you can determine if there are OHL trading opportunities for that day or not. If the open is the same as the high or the low price, you can easily frame a daily directional bias.
Let’s see why do a large majority of traders use the OHL strategy for day trading?
What are The Advantages of the OHL Trades?
The first advantage of the OHLC strategy is that it’s easy to use. Both novice traders and experienced day traders can benefit from this trading strategy. Secondly, this trading method doesn’t require prolonged analysis. This means you don’t have to spend countless hours analyzing the market.
You only need to follow the market for a few minutes each day and you can determine whether we’re going to have a bullish day or a bearish day.
Let’s see how to use the open high low close formula to determine the type of day (bullish or bearish).
How the OHL Strategy Can Help Us Determine the Type of Trading Day
Usually, the markets are going to have good volume within the first 15 minutes, which can lead to better trading opportunities. These trading opportunities will result from the expansion of the price range and an increase in volume.
For example, if the OPEN=Low of the day that is often an indication of smart money buying activity. It shows that the demand side of the market is outpacing the supply side of the market which leads to higher prices.
The reverse is true if the OPEN=High.
As a day trader, it’s important to concentrate your efforts right around the opening session because that’s really where the big money is made day trading the markets. Many day traders will get up very early to do their daily research and prepare themselves for the opening bell.
Let’s see how we can frame our OHL trading signals.
How to Find OHL Trades
The tricky part is to learn how to spot stocks that are open, close to low and open, close to high.
Some stock trading platforms allow their users to filter stocks based on the open, close to low and open, close to high criteria. This will display all the stocks that have the open equal to the high of the day and all the stocks that have the open equal to the low of the day at that moment in time.
All charts show the open high low close values in multiple timeframes.
So, you can manually check if the stock price has the same value for open and high or the same value for open and low.
Usually, a buy or a sell signal is generated within the first 5 – 15 minutes of the trading day. You can play around with the time settings and see which one works best for you.
If the opening price is the same as the highest price (the lowest price) after the first 5 minutes of trading you can use the OHL strategy for day trading.
If we know that there is a big probability for the high or the low of the day to be established early on the day, let’s see how we can use this to our advantage.
While we have your attention, you should check out our free stock trading class by clicking on the banner below and learn to trade like a pro today.
OHL Strategy for Day Trading
Day trading is probably the most exciting but at the same time the most demanding form of trading.
Moving forward, we’re going to explore the many ways we can execute the open high low strategy.
Here are a couple of examples:
Chasing Trading with Aggressive Trading
An aggressive trading strategy is to wait for the first 1-minute opening candle to form. After that point, if the open is equal to the highest point (bearish candle) or if the open is equal to the lowest point (bullish candle) we look for the following OHL trades:
- Sell at the break of the 1- minute candle low if OPEN=HIGH with a stop above the high of the 1-minute candle.
- Buy at the break of the 1- minute candle high if OPEN=LOW with a stop below the low of the 1-minute candle.
See eBay stock example below:
Important Note* If the stock price gaps above or below the previous day’s close the OHL trade setup carries a deeper weight.
Alternatively, you can wait for a retracement to the midpoint of the 1-minute candle before you pull the trigger. The OHL stock has the tendency to experience a pullback pattern especially if the first candle has a big price range.
See the GE stock example below:
The pullback strategy can help us reduce even further the risk and also improve the risk-reward ratio.
As for the stop-loss strategy, you can hide your protective stop-loss order at the previous day’s close. Or, alternatively, you can place it above (below) the current opening price.
Now, another trading approach is to try to ride the intraday trend.
This is where intraday trend trading comes into the picture.
Riding the Intraday Trends with OHL Trades
If you’re trading the open drive – opening close to low or opening close to high, hold your trade for as long as possible.
However, you need to become comfortable taking some heat.
Even if you’re intraday trading setup, the stock price will experience some type of pullback and it will unwind on you. But, the probabilities are showing that the majority of the days if OPEN = High (OPEN = Low) you got a good chance of price expanding in the direction of the opening drive.
See the Oracle stock chart below:
If you want to learn how to trade pullbacks more efficiently check out this guide: How to Profit from Trading Pullbacks.
Next, let’s see how to set targets with the OHL strategy for day trading.
Where to Take Profit When Day Trading
Typically, using the open high-low strategy, if you hold on to your OHL trades you have the opportunity for this to turn into a trend day move or for a significant stock price movement.
The simplest way to measure how far the stock price will move is to use the ATR indicator (Average True Range). The ATR can also be used as a proxy indicator for profit margin.
For example, if your favorite stock or index has an ATR of $10 and the stock has already done $2 at the open, you have a potential profit margin of $8 for that day. If you know that the majority of the time your favorite stock will have a $10 price range, or whatever that number might be, you have all the evidence you need to set that as your profit goal for the day.
See the NVIDIA stock chart below:
The daily ATR for NVIDIA stock was sitting at $15.
At the same time, the first-minute candle expanded more than $4 leaving us with a profit potential of $11. However, the stock price only moved an additional $9, which could have been our profit target for the day.
Keep in mind that the ATR indicator should be used only as a gauge of market volatility. Overall, the ATR still remains a good tool to measure the stock market’s high volatility options, but it needs to be used with other key technical price points on your chart.
Setting profit targets should be a key part of your trading strategy.
Next, let’s see some trading tactics for scaling in and out of positions.
Scaling In and Scaling Out of Trades:
If the opening price is the same as the high (or the low), there is a high probability that we have started an intraday trend.
Scaling-in simply means adding to your trades. At the same time, scaling-out means closing a portion of your position either for a profit or for a loss.
Scaling in and out is conducive when:
- The stock price momentum moves in the same direction as the open.
- When you have established a solid trading bias for that day.
Both of the two conditions are satisfied by the OHL trading strategy.
This means that the open high low strategy fits very well with the scaling in and out strategy.
See the Boeing stock chart below:
In the trade example above, the idea was to sell a portion of the position on weakness and add more volume to your trade into strength. This is because the opening price is the same as the highest price, which has led us to establish a bearish trend bias.
Final Words – OHL Trading Strategy
In summary, the OHL strategy for day trading can help you maximize your profits with the least amount of risk. One good trade per day with the OHL trading strategy is more than enough to achieve your profit goals.
So here is what you have learned:
- Simple OHL trade rules for buying and selling.
- Why the high (low) of the day has a high probability to form during the first 5 minutes of trading.
- Helps you establish a directional bias for the day.
- If OPEN=HIGH sell once 1-minute candle low is broken and if OPEN=LOW buy once 1-minute candle high is broken.
- Minimize the risk by entering on a pullback.
- ATR tells you where to take profit.
- Scale in and out of position to maximize profits.
Before you start chasing OHL trades on your live trading account, backtest this pattern until you become comfortable trading it.
Thank you for reading!
Also you can check out the 13 Best Day Trading Courses In 2021.
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