There are many trading strategies that people come up with that it can become quite overwhelming to know which one actually works best. Here's one that we know is good.
The Weak-Open Red to Green Stock Trading Strategy
This is a strategy we learned from investorsunderground.com, so we will give them credit for it. You can view their post that briefly mentions this strategy by clicking here. We will be going into more detail in this article about how exactly WE use this strategy and show more examples in this post so you may want to stick around and read the whole thing.
What is the Weak-Open Red to Green Strategy?
It is defined as a high-volume stock that has opened red, bottoms out in the morning after market open, which is then followed by a move higher to break the previous day's closing price. This creates a "red to green" break-out move. At least this is how Investors Underground describes it.
We took this idea and created our own set of rules/criteria for it. More on this below.
When we look to take bullish trades based off of this strategy, we mostly look for stocks that are in a strong uptrend, whether short-term or a bit longer term. This is because going with the direction of the trend will improve your odds of success.
Here's what the pattern looks like on a daily time frame chart:
Let's zoom in on this same stock and look at what was happening intra-day during the August-September run up on the weak open red/green days.
Here's the same stock, but intraday:
Refer to the notes and arrows in the images above showing the opening candles for a few days of intra-day price action on the stock GOGO.
Let's look at the JMIA example above in more detail by pulling up an intra-day chart from July 30th, 2020 to show an entry point.
As you can see from the notes in the chart, the first candle may have been hard to catch, but the stock offered another chance for a long position after showing signs of forming a bottom. The stop loss could have been under any of the arrows.
10 Rules For This Strategy
1. The stock should be in a strong trend on the daily time frame.
2. The stock should show history of following this pattern in the past. This does not work the same for every stock because not every stock acts the same. Check its past price behaviour.
3. The previous day's candle should be an "up" candle, not a down day, although there are some cases where it works after a small down day.
4. Look for high relative volume as pointed out in the images above.
5. The current day's candle (that you are trading) cannot go under the previous day's low. In other words, do not buy any morning dips that go below the previous day's low.
6. Buy in the morning on a dip after seeing some confirmation that the price is reversing higher. Place your stop under the low of the morning dip! The earlier in the morning it dips, the better, as there will be more volume to confirm the trade.
7. Days where the stock opens flat (instead of opening red) work too.
8. You can also buy the stock on a "red to green break out". Sometimes break outs can fake you out by looking like they are breaking out and then coming right back down. To improve your odds of success, there are two things you can do. First, you can confirm the break out with volume. An increase in volume as a stock breaks out is a sign that there is buying demand. Also, it may be easier to buy on a pull back that is retesting the red/green support area after the initial break out.
9. Take into consideration any key support/resistance levels on the daily time frame before taking a trade. A trade may work better or worse depending on if it is at an important support or resistance level. For example, if the red to green break out zone is a major resistance level that you've noticed from previous days, it's likely to fail at that resistance, or break out explosively if heavy volume comes in.
10. This has only been tested on individual stocks, not currency pairs, ETF's, or commodities.
Need Great Charting Software?
A great charting platform that we would recommend for serious traders is Tradingview. We use it every day as it has many useful tools and is very customizable. There is also an active trading community where people from all over the world post their trade ideas, so you never run out of ideas. Sign up through this link to get up to $30 to put towards a plan of your choice (or get the free plan).
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