In our previous article, we extensively covered the relationship between price and volume. You can combine that knowledge with a powerful trading strategy for a good capital appreciation. But please note that you still have to watch out for national and international economic and political events which could make the market more volatile and unpredictable. As part of the eighth tenet in this series, we will be covering several strategies which are back tested and beat the benchmark of your standard fixed deposit and savings bank returns. Some have even given better results than the returns from the Nifty 50 index.
If you are someone who doesn’t want to get too much into the technicalities of trading or technical analysis, then the OHL strategy is perfect for you. However, it does require a fair amount of understanding about scanners and how to choose stocks for the strategy. But otherwise, the strategy is simple enough to be followed by novice traders.
Anatomy of the Japanese Candlestick
Before we get into the details of the strategy, it is important to understand the anatomy of a Japanese candlestick as we will be using that for most of our strategies. It offers a comprehensive view of the stock while being minimalistic in its design.
As you can see from the image, a Japanese candlestick gives a lot of information about a stock for a given time frame. Like we mentioned previously, you could go with the 15 minutes chart for intraday. Longer time frames are used by positional traders and short and long term investors. If you choose to go with the 15 minutes time frame, you can observe the formation of the candle for 15 minutes before the next candle is formed.
Now that you have understood how the candlestick chart works, we can begin with the details of the open-high-low strategy. The underlying concept of this strategy is that, when the market opens at 9:15 AM, there are certain stocks whose open price is the high or low price of the stock in the 15 minute candle. For our convenience, let us consider those stocks whose open price is the low price of the stock. This is a BUY signal. Similarly, those stocks whose open price is the high price, should be sold for the day. This is a result of unrelenting buying or selling in large volumes which could dictate the trend of the stock for the day.
So, wait for the market to open and shortlist the stocks whose open price equals the high price or open price equals the low price. Wait for half an hour or forty five minutes and then see if the high or low has been breached. If it hasn’t, enter the trade after 10 AM based on the criteria we mentioned above.
How to pick stocks for OHL strategy
There are thousands of stocks listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). It would be practically impossible for a person to manually look at stocks which satisfy the open equals low or open equals high criteria. To make it simpler for traders, applications like Zebull Smart Trader have inbuilt screeners to shortlist stocks based on a select criteria. So, the software will shortlist the stocks whose open price is the high or low price for the day. You just have to specify the index whose stocks you want to trade. We always recommend Nifty 50 stocks as they come with more liquidity and less volatility.
Stoploss and Target
We have mentioned several times in our previous articles, the importance of maintaining a strict stoploss. The OHL strategy is no exception to that rule. Sticking to a stoploss is important for proper risk management. In the OHL strategy, for the open price equals low price condition, the signal will be a buy signal. In that case, the stoploss can be placed right below the low price. Similarly, for the open price equals high price condition which guys a sell signal, the stoploss can be right above the high price. However, if the first candle is too wide and the difference between the low and high is more than one percent of the stock’s price, ensure that you restrict the stoploss to one percent.
Another factor to keep in mind while working on a strategy is to keep a realistic target in mind. This holds true especially for traders because of the short time frame the stocks are traded in. Blue chip and large cap stocks are liquid and provide a reasonable amount of movement throughout the day so make sure that your target percentage is not more than 0.2-0.5%.
Chart type: Japanese Candlestick
Time frame: As per your choice (preferably 15 mins for intraday)
Stocks: Nifty 50 stocks
Buy Condition: Open price = Low price
Exit Condition: Target is met or stoploss is hit
Stoploss: Low price or 0.5-1%
Sell Condition: Open price = High price
Exit Condition: Target is met, stoploss is hit
Stoploss: High price or 0.5-1%
The Open High Low strategy is frequently used by both novice and experienced traders because of its ease of implementation. If you are starting out with day trading, you can get a feel of the trading ecosystem by using this strategy to understand how the market moves and what sectors and stocks you are comfortable with. Happy trading!