Opens versus Closes

Although there is no such thing as a 5-minute open or a 5-minute close, the concept is a simple one to understand. The first price tick of a 5-minute period is arbitrarily defined as the open, and the last tick of the 5-minute time segment is arbitrarily defined as the 5-minute close.

The relationship is a simple one. It is based on the well-established pattern for closing prices in a bull trend to be higher than opening prices and for closing prices in a bear trend to be lower than opening prices. By comparing a Moving Average of the 5-, 10-, or 15-minute openings with a Moving Average of the 5-, 10-, or 15-minute closings, we can quickly detect trend changes either before they occur or very early in their inception.

Figure 13-4a and 13-4b illustrate the ideal signals and relationship to which I am referring using a 5-minute chart of S&P futures. Examine my buy and sell signals in relation to price trend changes during the day. Figure 13-5 shows the same oscillator combination and signals on a Swiss franc chart.

As you can see from the illustrations, the signals are very reliable and tend to signal major moves. I call this method the O/C oscillator (O/C). Although the O/C method is wonderful for catching large intraday price swings, it does have its limitations which I will discuss later on. Before doing so, however, Ill review the construction of the O/C oscillator, and then Ill give you rules for using it.

Construction of the O/C for IntraDay Trading

The O/C is constructed as follows:

1. Use two smoothed Moving Averages (MAs) as follows:

a. A smoothed Moving Average of the opening prices consisting of 6 to 10 periods on 5-, 10-, 15-, or 20-minute data.

b. A second smoothed Moving Average which consists of closing prices of 12 to 24 period on 5-, 10-, 15-, or 20 minute data.

2. Buy and sell on crossovers of the two MA lines. When the MA of the close crosses over the MA of the open, a buy is signaled, and when the MA of the close falls below the MA of the open, a sell is signaled.

3. You will need to adjust the lengths used as a function of the time span you are using (i.e., 5-, 10-, 15-, or 20-minute data) and the volatility of the market you are following. There are no hard and fast rules for doing this. You will need to use your judgment; however, after you work with this method for a while, you will become quite adept at making the proper selections. (Formula for smoothed MA is in appendix at end of book.)

4. An important issue which you will need to deal with is the amount of the crossover. In other words, you will need to determine how much of a crossover will be sufficient to generate a signal in either direction. In this respect consider Figure 13-6 As you can see, the minor crossovers, which do occur, are not reliable. They must be sufficiently large. You will need to determine the crossover amount or threshold. You can do this fairly easily be examining recent signals. Be sure to monitor the O/C performance closely.