OHL Trading Strategy – What Is It? (Backtest And Performance)
Last Updated on February 20, 2023
Intraday trading is one of the most exciting but, at the same time, the most demanding form of online stock trading, and the OHL trading strategy helps you focus on the most important aspects of the trading day. As a day trader, you want to focus on where big money is made in the markets using the OHL strategy. But what is this strategy about?
The OHL trading strategy is an intraday trading strategy for stocks where the configuration of open, high, and low price levels in the first few minutes of the session is used to determine trade entry. A buy signal is generated when the open price is the same as the low price for the day, while a sell signal is generated when the open price is the same as the high price for the day.
In this post, we take a look at the OHL trading strategy. At the end of the article, we backtest the strategy.
OHL – what is it?
OHL refers to open, high, and low, which are three of the four parts of the OHLC price bar. The open price is the price at which the day’s trading session opened. The high refers to the highest price of the trading day as of the moment, while the low refers to the lowest price of the trading day as of the moment you are checking it. The other part of the OHLC price bar is the close, which is the price at which the price closes for the day.
The open, high, and low (OHL) price levels of each trading day are very important to intraday traders, as they can set the tone for the price movement for the trading day. Day traders and scalpers use them for their trading strategies, one of which is the OHL trading strategy.
What is the OHL strategy?
The OHL trading strategy is an intraday trading strategy for stocks where the configuration of open, high, and low price levels in the first few minutes of the session is used to determine trade entry. An OHL trading signal is generated when the opening price is the same as the highest price for that particular trading day or when the opening price is the same as the lowest price for that particular trading day within the first few minutes of the day’s trading session.
To put it simply, a buy signal is generated when the open price is the same as the low price for the day, while a sell signal is generated when the open price is the same as the high price for the day. The trading rules can be summarized as follows:
- If Open = Low during the first few minutes of the day (say first five minutes), go long with the next price bar:
- If Open = High during the first few minutes of the day (say first five minutes), go short with the next price bar:
For instance, the US stock market opens at 9:30 AM EST. During the first minutes after the stock market opened, you can determine if there is an OHL trading signal for that day by checking the open price and the day’s high and low as of that moment.
If the open is the same as the high or the low price, you can easily frame a daily directional bias — if the open is the same as the low, you anticipate a bullish day, and if the open is the same as the high, you anticipate a bearish day. We have backtested such a strategy below.
OHL strategy pivot trading
One good thing about the OHL trading strategy is that it is very simple to apply: both amateur and experienced traders can easily implement it. However, some traders have modified the strategy by including the CPR (central pivot range) levels in their analysis.
CPR points are three price levels plotted on the chart using the previous trading day’s highest, lowest, and closing price levels. The basis of using the previous day’s required levels is to assess the price movement of the stock based on the previous day’s performance to know if the stock is trending up or down. The three price levels are calculated by the CPR indicator using this formula:
- Pivot point = (High + Low + Close) / 3
- Top Central Pivot Point (TC) = (Pivot – BC) + Pivot
- Bottom Central Pivot Point (BC) = (High + Low) / 2
When combining the CPR levels with the OHL strategy, you go long only if the OHL buy signal occurs above the CPR levels. Likewise, you go short only if the OHL sell signal occurs below the CPR levels.
- 6 Pivot Point Trading Strategies – A Backtest | How To Trade With Pivot Points? (Definition, Analysis and Performance)
OHL strategy – timeframe?
The OHL strategy is an intraday trading strategy, so it is best used on the lower timeframes, such as the 1-minute or five-minute charts — at most, the 15-minute chart.
The strategy focuses on what happens during the first few minutes of trading, and as a day trader, it’s important to concentrate efforts at the opening session because that’s really when big money is made day trading the markets. It is when some of the smart money is setting the tone for the trading day.
The ideal thing for an intraday trader using the OHL strategy is to do their research early, set up their stock scanners, and get ready for the opening bell. Once the market opens, they just need to follow the market for a few minutes (say five minutes) to determine whether it’s likely going to be a bullish day or a bearish day based on the open price vs. low price and high price configuration within those five minutes.
Typically, a buy or a sell signal is generated within that first five minutes — if open = low, the day will likely be bullish, so you look to go long, but if open = high, the day has a bearish sentiment, so you look to go short.
OHL strategy – does it work?
The logic behind the strategy is sound: if the OPEN = LOW, it shows that the demand side of the market is outpacing the supply side of the market from the very first minute, a sign that smart money is likely bullish for the day. Similarly, if the OPEN = High it shows that the supply side of the market is outpacing the demand side of the market from the very first minute, a sign that smart money is likely bearish for the day.
However, the only way to know whether the strategy works is to backtest it so let’s go ahead and do that:
OHL trading strategy backtest
Now that we have explained the logic and theory behind the strategy, let’s backtest it.
OHL trading strategy backtest 1
We make the following trading rules:
- When the close of the 15 min intraday bar is higher than the open, we go long at the open of the next bar.
- We sell at the close of the day.
The first backtest is on S&P 500. This is the equity curve:
There are many trades, 1401 in total, and the average gain is 0.04% per trade. Even though minuscule, it’s much better than any random day (which has zero gains from the open to the close).
Let’s throw in another variable: does it matter if today’s open is above or above yesterday’s closing price?
The strategy improves if today’s open is above yesterday’s close: the average gain increases to 0.06%. This is not enough to make it into a tradable strategy, though, but still a nice improvement.
Here’s an example of one such trade:
The trading day opens higher than yesterday’s close, and the price goes up from the opening price. Thus, the green arrow signals a buy at the next bar open, and the red arrow signals when we exit. This trade had a nice 0.35% gain.
If the open is below yesterday’s close, the average drops to 0.01% per trade.
Let’s backtest another market: WTI crude oil. We use the same opening hours as the stock market (0930 to 1600 NY time), and we get the following results if today’s opening is above yesterday’s close and the close of 0945 is higher than the open:
As you can see, the oil price has a decent steady upward drift: the average gain is 0.12%.
OHL trading strategy backtest 1
Let’s flip the rules:
- When the close of the 15 mins intraday bar is lower than the open, we go long at the open the next bar.
- We sell at the close of the day.
When we backtest these trading rules, the average gain until the close is 0.00% for both SPY and WTI crude oil.
What happens when we include the second variable (above or below yesterday’s close)?
When today’s opening price is higher, SPY rises, on average, 0.06% towaerd the close, while WTI crude oil rises 0.05%.
If we flip (when today’s open is below yesterday’s close), both SPY and WTI drop further toward the close: -0.09% for both. The equity curve for WTI looks like this:
OHL trading strategy – conclusion
The backtests reveal that the direction of the first minutes of the trading day set the tone for the rest of the day for S&P 500 and crude oil. Our backtests were simple and perhaps naive, but we are confident that they can be developed further.
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