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Opening Price Principle - Larry Pesavento |
July 27 , 2005
16:31 @Ensign_HA: Welcome to today's training class on a special topic.
16:32 @Ensign_HA: This past week Ensign held an exceptional training seminar in Salt Lake City and Larry Pesavento was one of the trainers. His material was excellent, and those who did not attend really missed out on a great seminar.
16:33 timNY: yes Larry spoke very highly of it in his room
16:33 @Ensign_HA: Everything went so very smoothly with all the facilities and the seminar content. One of the attendees was Don Hall, the author of the Pyrapoint book and method, and he is now 77 and is excellent health and mind. He has attended many seminars over 25 years and his compliment was that our seminar was at the top of the list for value and content.
16:35 Shar: Congratulations. :-)
16:35 @Ensign_HA: Anyway, one of the items in Larry's training material was the 'Opening Price Principle', which he showed many examples of on stock charts picked at random by class participants, and the track record of on the spot checking of the principle was impressive. After seeing the manual application of discovery for the opening price principle, I could see that the method could benefit by designing a DYO to do the math and throw in the benefit of some visual graphics of the Entry Price and the Stop. Everything is quite mechanically calculated, which is perfect for backtesting and for implementing in a DYO.
16:37 @Ensign_HA: So today's class will be the introduction, discussion, and training on the Opening Price Principle, as taught by Larry at our seminar and as understood by me. Sorry, if in my newness to this method I have overlooked some key parts that Larry understands and which I did not perceive.
16:38 @Ensign_HA: Now, in the material we cover today, I will be using a new template you can download now from my web site, which is the OpeningPrice template. Use the Internet Services tab to download this template, and we can discuss its design and its application on sample charts.
www.dacharts.com/faq/Ensign-downloads.htm
16:40 Sportsrep2: is this meant to be used with futures also Howard?
16:41 @Ensign_HA: one of the issues that differs between stocks and futures, is the futures have evening session where they can release some of the pent up emotion. Whereas for stocks, the market is closed, and so many stock traders evaluate what has happened when they get home at night. This might generate emotion that cannot be released until the open of the market the next morning.
16:42 @Ensign_HA: Some of this emotion then moves the market with gaps on the open, wilder first hour of trading, some action and reaction to this first hour of trading, and then resumption of some trend for the balance of the day. This action may be available in the futures too, but the presence of an evening session to release some of the emotion will make the 1st hour of trading be different.
www.ensignsoftware.com/tips/tradingtips67.htm
16:45 @Ensign_HA: here is the material I am in progress of preparing for the upcoming July issue of Trading Tips. However, you can read along with me so I do not have to type so much. As you can see in the viewer above, there are 7 rules, and the 1st rule is not a firm one, just an encouraged one. ie, the method is for use with active stocks, particularly on the Nasdaq.
16:47 @Ensign_HA: the method waits for the 1st hour of trading to complete, and then observes the range of this first hour and where the current price at 10:30 eastern time (1 hour after the open) is in relation to the opening price. If at the 1 hour mark the current price is above the open, then the day is a green day and we enter a Limit Order for a BUY. If we are below the open price, we enter a Limit Order for a Sell.
16:48 @Ensign_HA: the Buy price is 61.8% of the 1st hour range down from the 1st hour high. Thus we expect some retracement to this Buy entry price. We may or may not get filled at this price because it is a Limit Order and the market may never retrace to our fill price.
16:49 @Ensign_HA: In the example, the thick green line is the calculated retracement level, and the price was filled, about 20 minutes later and had a beautiful advance to the close of the day, where upon we exit the position with a nice profit.
16:50 @Ensign_HA: The trade is not kept overnight, either we exit on the close or get stopped out.
16:52 @Ensign_HA: the Sell Entry Price is calculated as 61.8 % of the 1st hour range offset from the low of the 1st hour range.
16:52 @Ensign_HA: again we expect some retracement to our fill price and if filled, hold the short to the end of the day or until we are stopped out.
16:52 @Ensign_HA: the Stop is set at 50% of Yesterday's range offset from the entry price. Thus if the market is calmer, the stop is tighter, and wider if the market is more active. which a nice characteristic and it is self adjusting for any stock you do the method with, as in GOOG is a $300 stock and MSFT is a $25 stock, and yet the stop is reflective of the differences in the pricing of those securities.
16:55 @Ensign_HA: lets move to the material below the 1st picture.
16:55 @Ensign_HA: The OPP works in your favor because statistically the opening price is within 25% of the high or low of the daily range 65% of the time. I am using Larry's spoken numbers without having verified those statistics myself, however, they seem logical and in keeping with observation
16:57 @Ensign_HA: So if the opening is going to be near the low of the day, chances are an hour into the day the price is higher, and we intend to only trade the long side and vice versa, if the open is going to be near the high of the day, chances are the market is trading lower than the open and we then intend to only trade the short side.
16:57 @Ensign_HA: now look at the picture of the first DYO and the discussion about each line below the DYO image
16:58 @Ensign_HA: Line A is testing the time for 1 hour into the day, which using Eastern time on your chart would be 10:30 because the NYSE and Nasdaq open at 9:30 EST. This flag will be true after 10:30 and false ahead of 10:30. This flag is stored in [14] for testing by Line B in this DYO and by Line A in the 2nd and 3rd DYO to be shown later on.
17:00 @Ensign_HA: If we are in the 1st hour of the day, we have no calculation to make, so Line B is the abort the evaluation and continue no further. We need several values for making the calculations, and the balance of this DYO get those values and puts them in GVs for use later on.
17:00 @Ensign_HA: Line C gets the 60 minute high, and Line D gets the 1st 60 min period low
17:01 @Ensign_HA: LIne E gets today's open
17:01 @Ensign_HA: Line F and G are clever in getting the close of the bar at 10:30, ie after 1 hour.
17:02 @Ensign_HA: Line H gets yesterdays high, Line I yesterdays Low, and Line J computes the half range from yesterday's range values.
7:03 @Ensign_HA: A 2nd DYO is used to test for the Buy condition which requires that the 60 min price be above the opening price.
17:03 @Ensign_HA: This is the test on Line B in the next picture and this will color the chart background green so you do not make any mistake about whether it is a Buy setup or a Sell setup (red color)
17:04 @Ensign_HA: If it is a Buy setup, then the Buy entry price is calculated as explained above by Line D.
17:04 @Ensign_HA: And Line E then calculates the stop as half of yesterday's range subtracted from the entry price on Line D.
17:05 @Ensign_HA: Both lines are shown on the chart and will be labeled in the margin for the current day with their price.
17:05 @Ensign_HA: The 3rd DYO is a mirror of the logic of the 2nd, and implements the Sell entry levels, paints the background red and puts on thick Red entry price line and its protective stop. This you can see is the case by study of the examples in greater detail.
17:06 @Ensign_HA: What is nice is having it all automated to eliminate the guesswork and the computation of the entry prices and their stops.
17:07 @Ensign_HA: in the article I then show examples of
1) not getting filled, so it is a No Trade day.
2) being in a position but with a small loss at the end of the day
3) getting stopped out
17:08 @Ensign_HA: On the 3rd example of getting stopped out I added my opinion that it should have been a Break Even day because the chart was sufficiently ahead and that the stop should have been moved to break even long before the downward move. I would have done so in real life because the chart was 35 to 40 cents ahead, and PARTICULARLY because the range of the bars had gone into balance and a pennant point, and we all know bigger moves can follow such balance points. There was no reason to leave yourself exposed to have lost anything on the 3rd chart showing the Stopped Out case.
17:11 @Ensign_HA: Then I show several examples of when the OPP is successful, with an added comment or two.
17:11 @Ensign_HA: the 2nd chart in this section shows a fulfillment at 14:00 with only 2 hours remaining in the day. Yes the trade was successful, but Larry had just such a chart in the training class and it was he who said you probably would not have traded this chart in reality because of the lack to time remaining for the chart move to develop. 2 hours left was a factor to be considered. So while it was a winning trade, you probably would have cancelled the order by 12:30 when it did not work out for a fulfillment more promptly.
17:14 @Ensign_HA: The next chart shows that occasionally the entry price is worse than the current price, in which case you probably will enter immediately at a better price.
17:15 @Ensign_HA: Then I found an example of sideways chop day and it happened to still be a profitable day, but could have been otherwise. Having a few small winners will pay for a few small losers. What you are trying to put in the bank are the occasional good trending days where the OPP puts you in the trade early on and then you right it all day to the close, as in the initial example chart.
17:17 @Ensign_HA: I am in the middle of trying to get a feel for the percent of winners, as inquired by someone earlier on in the class. This is a table I am in the middle of filling in and should complete later today in preparation for publishing the article. I have picked 10 stocks, of which I have no prior knowledge about their goodness or badness with the OPP method. Many of the days are NT days because we are in the right direction but the market did not retrace to get us on board.
17:20 @Ensign_HA: But I will stick with Larry's principle as taught of using a Limit Order at a specific price as determined by the 1st hour range . I am keeping this purely mechanical, and not trying to tweak any parameters for time or for entry price calculations. Some of the missed entries are by a few cents, which is painful to see a missed trade that works out really well. Just the same it goes in the table as a NT day, or no trade that day.
17:21 art45: good honest test Howard
17:21 @Ensign_HA: however, another way to look at this is to not fret over it. There are other stocks, other days, other trains about to leave the station and if the system works well enough today, yesterday, last week, last month, then there will be plenty of opportunity in the future.
17:23 @Ensign_HA: so far, you can see the Net for each symbol evaluated so far is Positive, which is a real good beginning. The table shows more winning days in green than losing days in red but best to reserve final judgment until the table is completed.
17:24 @Ensign_HA: ok, any questions not yet answered??
17:24 TOC: @Ensign_HA, nice....is there a mechanical profit target or profit objective?...didn't see any mention
17:25 @Ensign_HA: no toc, it was hold to end of day, or be stopped out
17:25 TOC: k ty
17:25 @Ensign_HA: I have thrown in my opinion on a couple charts about moving the stop to break even once you are sufficiently ahead and Larry had a comment like that as well. No reason to be exposed to any loss once you are sufficiently ahead in the trade. Try to let it run, however.
17:26 bubba: It would seem highly volatile stocks, relative to price are best candidates, or charts with long candles and short tails, right?
17:26 @Ensign_HA: correct bubba - long bodies and short tails are good candidates.
17:26 @Ensign_HA: on the list, let me say how I picked the stocks. I picked MSFT, and YHOO because they a very common stocks. I added GOOG because it is high price flyer and a newly traded stock. I used the Hot List button in Ensign to get 3 stocks off of the MSFT Filter list for High Volume stocks for the past week and 4 stocks came from the top of the High Volume losers (lower price) for the past week. So 7 of the 10 are from filter searches for higher then usual volume for the past 2 weeks.
17:28 scJohn: why use the 1st 60-minutes as, say the 1st 30-minutes of the trading day?
17:29 @Ensign_HA: scjohn, I have taught you Larry's OPP method, and if you want to try a different idea, then you are welcome to research it.
7:30 @Ensign_HA: modify the DYO provided to use some other opening time period and see if the results you get are better or worse than the one presented by Larry. It might be, might not be, I cannot say. Backtesting your idea will obtain the answer. So you will just have to apply some hard work yourself to discover the answer to your questions.
17:31 bubba: @Ensign_HA, are there other screens or web screen tools you would use beside higher than avg volume? Thanks
17:32 @Ensign_HA: bubba, I just used the high volume lists as a means to have a method to my madness, lest I be accused of hand picking the example stocks in the test.
17:32 @Ensign_HA: I know we prefer active stocks, so Higher Volume filter seemed like a logical place to find activity. I do not know if the activity is moving stock higher or lower, and tried to pick a few from each list to be unbiased
17:32 Shar: Howard, can one use this with tick charts? Or is it just best to use with 5M?
17:33 @Ensign_HA: the time frame of the chart does not really matter, and constant tick charts will work with the template as well
17:33 @Ensign_HA: I used 5 min because it showed the 1st hour well, and bar spacing fit nicely in the posted examples. The 1 hour after the open is quite independent of the chart timeframe. In 1 hour you have a 1st hour range, and thus an specific entry price. I liked the 5-min chart because I would for sure have a bar whose close was the 10:30 close price for comparing with the opening price.
17:33 Shar: thank you.
7:37 @Ensign_HA: ok, plenty to digest today in this class and the template is a nice tool to enable your investigation. Have fun with it, and I will resume my completion of the table
17:37 art45: Howard most useful class for me so far, thanks for sharing this
17:37 @Ensign_HA: any questions before I call it a day?
7:37 @Ensign_HA: welcome art
17:37 @Ensign_HA: always fun to see what someone else who is successful embraces
17:38 @Buffy2: thanks Howard very interesting - glad Larry let you show us
17:38 hmm: tks very well done
17:38 zulu467: thanks Howard,
17:38 TOC: ty Howard
17:38 terry: ty take care
17:38 @Ensign_HA: one idea in my head is this, but not yet researched
17:38 @Ensign_HA: we have about half the table as NT days, and that is inviting to me. Every NT day is in the right direction, just failed execution of an entry.
7:39 @Ensign_HA: A research item would be this, and that is to immediately put on a trade at the 10:30 price so there are not NT days and then see how many of these ended up being profitable.... possibly a blend of the new idea and Larry's current idea - put half of the position on immediately at 10:30 and the other half at the current entry price. Do not know if this variation will pay for itself, or end up losing money, but it is an idea needing research.
17:41 @Ensign_HA: Since every NT day is in the right direction, but a missed entry because the market never came back to get us on board. So the gut feel, is the NT days are the potential gold mine of missed opportunity. The direction was right on the NT days. If the direction was wrong, we would have definitely been in the trade and possibly been stopped out and the table shows all the days where the direction was definitely WRONG and still the OPP is holding its own and showing a profit. Perhaps I am talking myself into a research project for a future Trading Tips issue.
17:43 Dominick: maybe mentally adj the entry 50% between the entry and the 10:30 price
17:44 @Ensign_HA: yes, that is another possibility dominick
17:44 Sportsrep2: thx Howard
17:44 art45: you too Howard, great class
17:44 Shar: Thanks Howard.