The Opening Gambit, S&P TSX Capped Energy Index

I decided that, because I am a very visual trader, I would put some of my rules and setups on charts with some notations for easier reference. I had a hard time trying to write this stuff out so that it made sense without the charts, so here is the first.

The Opening Gambit

Earlier last year I tried a bit of very early trading, as in the first minute or so of the market open. I did not have much luck getting orders filled in a timely manner and I often got nailed with a bad fill. The problem was that I was testing the market open and had no real plan other than to see what kind of order fills I might get. I don't recall specifics but I am pretty sure that I was trading a stock that had a fairly wide spread which is indicative of a lower volume issue. I have since tried again with a plan and found that my earlier observations were clouded by the resulting losses for those early tests.

This is a reworking of the strategy with some rules for entry and exit.

First, some general comments about my use of the simple moving averages.

I use the Simple Moving Average (SMA). Some use the exponential, weighted or even volume weighted. I have plotted them all and none make any real huge difference, it is more a matter of using one consistantly so any will do. I like to keep it simple, literally.

The 30 and 50 SMA for the short term trending and the 200 SMA for the longer trending. All of these are based on the minute timeframe. I plot daily and monthly pivot points but those have no direct bearing on most of the entry and exit plans used in the chart studies. I will use them as they often will confirm an entry or provide a great price point for a stop order, so I may plot some that are relevent

In this example the trade is a rather speculative trade and has the possibility of backfiring, and backfiring very quickly so getting out quickly is important. Entry can be through the use of a limit order or market order, I prefer the later as it gets me in, period. The exit, early on, will be a manual market order or a stop market order if the price moves in my favour in the first few minutes. I do like to get the stop in as early as possible as the worst time to have a connection issue is on a busy market open day, slow transactions or and overloaded broker can cause major trauma to an account in a hurry...so it is a risk to be aware of.

S&P TSX Capped Energy Index:

(I put MACD on there just in case anyone likes it, I don't use it as it is far too slow an indicator for me)

In this case the price opens a little lower the the previous day close, about $2 down. It's not clear on the chart but the price drops about 70 cents from the open then heads back up and crosses teh 200 SMA in the next minute. There is no test of the 200 but the 30 is already over and the 50 was already trending up from the day before so the price is very quickly over all of the moving averages.

Part of the key is the previous day, the price dropped over the last half of the day and started a late rally into the close crossing the 200sma... essentially the next day is a continuation of the same rally and provides the 200 sma test. This makes it something to watch for, had the end of the day been different the initial action might have been to quick to consider.

The stop can be set right away at the 200sma as if the price hits this point again the trade was most likely wrong. Early trades will be expecting a fast move so the 30 or 50 sma can be used as a stop. I don't have the stats but if the price crosses the 30 it is likely lost momentum and may reverse or wallow anyway... if the 50 is crossed then this is even more probable. They are good stop points. I could always split the difference and use a 40 sma or just set the stop at he 30, move it back up to the 30 when the 50 catches up to the stop, basically steps connecting the 30 and fifty as they rise in unison.

For the sake of math, the profit on this move would be $7.75 or 4.1% of the opening price. This is important as trading HEU, the leveraged ETF for this index, would yield 8.2%, in theory, for the same move, less some allownce for spreads, commissions and other fees. Checking the chart it would actually only yield 6.9% or 24 cents per share given the most likely entry and exit points...again, less commissions only as spreads are included in that approximation.

Jeff.