Trading the gap can often be very profitable and offer well defined REWARD/RISK trade parameters. One such strategy that trades around gaps is the OOPS Trading System which was published by Larry Williams in his book “Long-Term Secrets to Short-Term Trading”.
In today’s article we will outline this strategy and show you how it can work in today’s market. In a recent article we reviewed the validity of the “Sell in May” strategy and came to the conclusion that you need to adjust your trading in the May through October trading period. Well here is a strategy that could help you trading performance in the next few months.
OOPS Trading Strategy Overview
The OOPS Trading strategy was published in the early eighties and described a method that can trade gaps profitably, when a trade is entered into in an attempt to fade the direction if the opening gap. The name comes from the exclamation that the broker makes a short time after convincing their client to trade in a particular direction and they are stopped out in short order.
This is an ideal day trading strategy, where you are able to identify a short term reversal in trend, particularly when the daily trading ranges are wider than normal. It relies on a reversion to the mean when a stock or index move is exaggerated in either direction and is ideal for Swing Traders.
The OOPS trading strategy is applicable to any timeframe from 5 minutes, hourly, daily , weekly and monthly. Profitability is greatly enhanced if you enter the OOPS trade that is in the direction of the higher timeframe trend. It is essential that the previous day’s range bar is wider than average range, which can be defined by measuring the average true range (ATR).
OOPS BUY Strategy
OOPS BUY Strategy setup consists of the following steps:
1. On a daily chart you need to identify a period when there is a sustained downtrend for at least a few trading sessions. That is red candles with daily trading ranges greater the average true range (ATR) of the past few periods.
2. The OOPs trade setup occur on the last day of a downtrend, when there is a gap down, which ideally opens well below the previous day’s low.
3. The trigger occurs when the stock/index rebounds above the prior session’s low and is confirmed when its trades above the previous session’s close.
Once steps 1, 2 and 3 are satisfied and the market gaps lower, place a BUY STOP order above the previous day’s low, with STOP just below today’s low.
In a nutshell we are looking for trades from our list of potential OOPS setup trades, that have sold down at a higher than usual rate and are breaking up from their 5, 15 or 30 minute opening ranges and are filling the downside opening gap. Trade triggers are ignored after mid-day and the trade reversal is confirmed when the market trades above the prior close. Trades can last from 1 to 8 days, but Larry Williams suggested close out on the first profitable open, as he found that holding overnight consistently worked best for the markets he traded.
CHART 11&12: OOPS BUY Trade Setup and Entry
OOPS SELL Strategy
OOPS BUY Strategy setup consists of the following steps:
1. On a daily chart you need to identify a period when there is a sustained uptrend for at least a few trading sessions. That is green candles with daily trading ranges greater the average true range (ATR) of the past few periods.
2. The OOPS trade setup occur on the last day of a uptrend, when there is a gap up, which ideally opens well above the previous day’s high.
3. The trigger occurs when the stock/index retraces below the prior session’s high and is confirmed when its trades below the previous session’s close.
Once steps 1, 2 and 3 are satisfied and the market gaps lower, place a SELL STOP order below the previous day’s low, with STOP just above today’s low.
In a nutshell we are looking for trades from our list of potential OOPS setup trades, that have run up at a higher than usual rate and are breaking down from their 5, 15 or 30 minute opening ranges and are retracing to close the opening gap. Trade triggers are ignored after mid-day and the trade reversal is confirmed when the market trades below the prior close. Trades can last from 1 to 8 days, but Larry Williams suggested close out on the first profitable open, as he found that holding overnight consistently worked best for the markets he traded.
OOPS Strategy Observations
• The well defined rules enable you to define clearly your Trading Plan, so that you are entering into well defined and high probability trades.
• You can search for setups at the close of the previous session, so that you have a daily routine with a pre defined list of OOPS potential stocks.
• The OOPS strategy can also be used in a weekly trading system.
There are number of refinements that D2MX Advisory have developed to make this strategy, even more reliable and profitable in the Australian market. Contact us at 1300 610 024 or firstname.lastname@example.org for more details.
Recent Sample Woodside Trade
Woodside presented an excellent OOPS trading opportunity yesterday when it gapped down after it announced that it had terminated its agreement to take a 25% stake in a $US2.7 billion natural gas project the Leviathan offshore gas field in Israel. The volatility on the market open was a surprise because it had been rumoured for over a week that Woodside would step aside from the deal and that this actually meant that Woodside was cashed up. The OOPS trade triggered $40.92 (just above the prior close) with the Initial Stop at $40.17. This position could now be closed for a 2.5% profit at $42.00 (on 22 May’14).
CHART 13: Woodside OOPS trade.
The recent market volatility is offering traders with well defined trading setups, with multiple opportunities to generate consistent trading income. The recent Woodside trade is an excellent example of an OOPS trade. Note the ASX200 index is also offering multiple opportunities to swing trade and a modified OOPS trading strategy is producing multiple swing trading profits.
When considering how to generate trading profits in this market, the OOPS trading strategy offers well defined and measurable trades.
If you want to take advantage of the modified D2MX Advisory ASX200 Index OOPS Trading Opportunities , then we have a Trading Plan that can help you improve your results. Contact us at 1300 610 024 or email@example.com.
Investment Adviser – D2MX Trading
Also in the series Stock Trading Tips for All Types of Market Environments:
Part 1: A Simple Trend Finder Scanning Method
Part 2: Going For Gold
Part 3: Top-Down Analysis – A Valuable Approach
Part 4: The Power of Compounding
Part 5: Measuring Your Trading Performance
Part 6: Insuring Your Portfolio
Part 7: Aussie Dollar Strength and Your Portfolio
Part 8: Investing in 2013
Part 9: Investing in 2013 (continued)
Part 10: Yield Investing In 2013
Part 11: Investors, the results are in!
Part 12: Show me the money!
Part 13: Leading Indicators: Copper (1)
Part 14: Leading Indicators: Copper (2)
Part 15: Mind the Gap – Trading Risk with CFDs Versus MINI Warrants
Part 16: Simply Staying With The Trend
Part 17: Use Contingent Orders To Manage Your Trading
Part 18: The Aussie Materials Sector and Your Portfolio
Part 19 (a): Going For Gold
Part 19 (b): Going For Gold (Stocks)
Part 20: Silver Lining – Trend Identification
Part 21: Trading Your View
Part 22: Christmas Season Trading
Part 23: Stocks for the 2013 Christmas Hamper
Part 24: 2014 – Transition Trading
Part 25: Stop Losses, Slippage and Risk
Part 26: Investing For Yield
Part 27: Sell In May
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.