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At Ensign's highly successful training seminar in Salt Lake City, Larry Pesavento taught his 'Opening Price Principle', which can be summarized with the following rules. This trading method can to be used with active NASDAQ and NYSE stocks trading above $20.
The Opening Price Principle is based on a statistic that the opening price is within 25% of the high or low of the daily range 65% of the time. Therefore, use this statistic to your advantage by trading in the direction of the market in relation to the opening price. When the market is trading below the open, a short position will be taken. When the market is trading above the open, a long position will be taken. Additional examples of this principle will be illustrated. But before getting there, the Opening Price Principle can be automated using the Design Your Own™ study in Ensign Windows. Three DYO set-ups will be shown, and then used to evaluate the Opening Price Principle on several charts.
Line A compares the bar's time with 10:30. The charts shown use Eastern Time, so 10:30 is one hour after the 9:30 open time. Edit the numbers on Line A and on Line F to reflect the time zone used by your charts. The Boolean result of the test on Line A is stored in GV [14] for later use, such as by Line B. Line B tests the Boolean result from Line A. If the time is during the 1st hour of trading, the evaluation is aborted. The balance of the DYO is evaluated only when the time is after the 1st hour of trading. Line C finds the High in the first 60 minutes of trading and stores this 60-min High in GV [10]. Lines H, I and J find the range for Yesterday and store yesterday's half range value in GV [22]. The values needed to compute the entry price levels and stops have been found and stored in Global Variables for use by the following two DYOs.
Line A tests the 1st hour time condition previously stored in GV [14] and aborts if the time is ahead of 10:30. Line B tests whether the Close in [13] is above the Open in [12] and stores the Boolean result in GV [1]. Line C looks a the Line B result and aborts execution when the Close is below the Open. Line B will also color the background of a Buy day with the light green color. Uncheck the Show box on Line B to remove this background coloring. Line D calculates the Buy Long entry price. Value is the High in [10] and Next is the Low in [11]. 0.618 of this range is subtracted from the High. The Buy Long entry price is stored in GV [23] and plotted on the chart as a thick Green line. The entry price and the word 'Buy' will show in the right side margin for the current day. Line E calculates the Stop price by subtracting half of yesterday's range stored in [22] from the entry price in [23]. The stop level is plotted on the chart as a fat blue bar, which will be below the Buy Long entry price line. The Stop line is also labeled in the right side margin with its price and the word 'Stop'.
The 3rd DYO is a mirror image of the previous DYO. It tests for the Close price in [13] being below the Open price in [12], and computes the Sell Short entry price and the protective Stop price. The Sell Short entry price is shown on the chart using a thick Red line and labeled with its price and the word 'Sell' in the margin. The Stop line is shown in Blue. A template for the Opening Price Principle containing these three DYOs can be downloaded from the Ensign web site using the Internet Services form. The name of the template is OpeningPrice. Obviously, the initial example was hand picked to be an excellent example of the Opening Price Principle. It does not happen so perfectly every day. Often the market does not retrace to the entry price level and your Limit Order is never filled, as in the following example chart.
There will be days when the protective stop is touched and the trade is stopped out with a loss, as shown in the next example. One should consider moving the Stop to break-even after a sufficient profit has been achieved.
On other days, the exit at the end of the day will be with either a small gain or a small loss, as illustrated in the next chart.
The Opening Price Principle has merit and is worth your consideration and further investigation. Consider the following charts illustrating when the Opening Price Principle resulted in a successful day-trade.
As a quick and simple investigation, I picked 10 stock symbols without any foreknowledge of how they have performed during the month of July and summarized the results of the Opening Price Principle in the following table. 'NT' will mean 'No Trade'. Though the direction was correct for the day, the market did not have a retracement sufficient to get a fill on the limit order. Thus the method missed the ensuing directional move. 'LT' will indicate a 'Late Trade' which probably would not have been taken because too little time remained in the day for a good trade to develop. 'BE' indicates the stop should have been moved to break even, in my opinion, after being sufficiently profitable during the day. The numbers are an estimated win (green) or loss (red) shown in pennies as the spread between the exit price and the entry price. A 'L' indicates a Long Position was taken. A 'S' indicates a Short Position was taken.
Though the method appears to be profitable, the area of the No Trade days is of great interest to me. These are directional days where the direction was correctly called, but the position was not established because the market did not retrace to the entry price. Further research is needed to see if it would be profitable to establish half of one's position immediately using the 10:30 closing price, and the other half of the position at the entry price calculated by the Opening Price Principle. Perhaps this type of research can be published in a future Trading Tips issue. I hope you enjoyed this article about Larry Pesavento's Opening Price Principle as I understand it after having been exposed to it at the Ensign training seminar. Article by Howard Arrington The opening article documented Larry Pesavento's Opening Price Principle. The article showed favorable results for 10 stocks for one month of examination. However, I felt the need for further research to answer questions, such as whether the 0.618 retracement distance was the optimal retracement percentage to use. Also, should the stop be based on 50% of yesterday's range or some other percentage? This follow-up article will attempt to find answers to questions like these. Larry suggested a list of 40 stocks for this research project. Ten stocks were picked for each of these 4 general categories: Low Beta, $30 to $60 price, $60 to $90 price, and over $90 price. The following list attempts to have a varied representation of stocks for our research.
The project used Ensign Windows and its custom programming language called ESPL to implement the trade rules and tally the results. The results show the simple accumulation of profit or loss for a stock, based on 1 share. If a stock was bought at $25.00 and sold at $25.62, then the trade is counted as a Win and the Net accumulates 62 cents. No slippage or commission has been factored into the results. This simplicity is acceptable because we are seeking to find which parameters result in an improvement or degradation of the Opening Price Principle system. The system rules for the research project were these:
Trade detail generated by this project could fill a book. So, only a sample of the detail is shown here to illustrate the results. The following example of trade detail is for the Low Beta stock list, using 0.618 for the retracement percentage for the entry price objective, and a stop size of 50% of yesterday's range.
For the SBUX symbol, the results for 25 days show that 10 winning trades accumulated a gain of $2.40 and 5 losing trades accumulated a loss of $1.06. Two of the 5 losing trades were from being stopped out. The Net for this symbol is a positive $1.34. No trades were made on 10 of the days because the market never retraced to the desired entry price level before the time cutoff at two hours before the market close, or the 1st hour price was unchanged from the opening price (no bias). Retracement Percentage A protective stop was calculated to be 50% of Yesterday's Range offset from the Entry Price. Occasionally, the 1st hour price was already more favorable than the Entry Price level, in which case the trade is initiated at a more favorable price. The following table shows the trade summary for 5 different retracement percentages from 0% to 100%. The 100% retracement means the Long entry price would be the Low of the 1st hour range, and a Short entry price would be the High of the 1st hour range.
The results suggest that a retracement of 0.786 is the most favorable percentage to use of those tested. Positions are initiated nearly 50% of the time. Half of the trades were winners and half were losers. The Net of only $43.61 from 475 trades is a concern because the average gain per trade per share is only 9 cents, and that is before slippage and commissions are factored in. Stop Percentage
The results suggest that the profitability of the system is dependant more on the Retracement percentage than it is on the percentage used to calculate the protective stop. There is more variation in the result going vertically in the table, than there is in going horizontally in the table. Some of the rows have their best results using the 0.500 percentage of yesterday's range, and others do better using a more generous stop. I think this table confirms that the 0.500 percentage is an appropriate parameter to use. Money Management
Larry received the following e-mail from another trader who conducted independent research of the Opening Price Principle. "Just wanted to let you know about some testing I did on the OPP strategy. I bought the book at the NYC trader's expo and have coded a simple program to use it on my TradeStation platform. I've historically tested it with about ten stocks or so and just started using it on one, RYL. The system does the following:
Amazingly, any symbol I've back tested has more winning that losing trades. Maybe it's indicative of the market, but shorting is much more successful than going long. In fact, on TASR the system wins over 70% of the time and the annual return is over 100%. Unfortunately, my broker can't find TASR shares to short. It has pretty good results on GOOG and RIMM also. It's important to mention that the system is only optimized for which bar to enter so curve fitting is minimal. I make a visual assessment of a stop loss point when I set up the system but that could be optimized too. All my results are for 100 days of back testing. Obviously picking those stocks with good intraday volatility and small tails on a daily candlestick chart makes the best candidates. If you have any in mind you want me to check, let me know. Thanks for the lead on this system. [If Howard wants to publish my e-mail] That's fine with me, but it's not exactly the same system Howard coded. I'm putting [a large account] to work every morning on OPP and wouldn't be doing it if it didn't work." -- Bob (Bubba in chat) Marsh "Have been test driving the Opening Price Principle on Ensign. Larry & Howard deserve a medal for your work together on this in my opinion. Do you use the principle on longer time frames, i.e. Weekly, Monthly or even quarterly charts? As price structures form on all time frames I am assuming the same basic formula could be used on longer time frames. Your thoughts would be welcome." -P. Biggs 07-29-2005 Reply: "I only use the Opening Price Principle for intraday --- it was never tested on a longer term --- the folks at Ensign should get a medal --- but still most people will be too lazy to work it out." -Larry Pesavento 07-29-2005 Summary What have these articles on the Opening Price Principle accomplished? Larry presented the basic strategy. I and others have used our abilities to back test the basic strategy and variations of it as we mutually seek to understand the impact of adjusting parameters, determining which type of stocks the system seems better suited for, and how results might be improved upon through the use of money management skills. Our efforts are not the final authoritative answer. Please continue the investigative process by doing research of your own. Article by Howard Arrington Last modified 1/21/09 1:21 PM |
