All You Need to Know About the OHOL Trading Strategy

The Open-High-Open-Low (OHOL) trading strategy is a popular intraday trading technique for making quick profits. This strategy focuses on a stock’s opening price and how it moves in the early trading hours. It is mainly used in stock markets but can also be applied to futures and currency trading.

Traders following the OHOL strategy buy or sell stocks based on whether the opening price matches the highest or lowest price of the day. While this method can be profitable, it also comes with risks. This article will explain how the OHOL strategy works, how to use it, and the potential risks involved.

What is the OHOL Trading Strategy?

The OHOL trading strategy is a method that helps traders take advantage of short-term price movements in the stock market. Here’s how it works:

• Open Low (OL): If a stock opens at its lowest price, traders see it as a buying opportunity and expect it to rise throughout the day.
• Open High (OH): If a stock opens at its highest price of the day, traders see it as a selling opportunity. They expect the stock price to fall later in the day.

This strategy is used only for intraday trading, meaning that traders buy and sell stocks within the same day. By the end of the trading session, all positions are closed, and no stocks are held overnight.

How to Execute the OHOL Trading Strategy

Adopting this trading strategy is simple:

Step 1: Identify Open Price

• The first step is identifying a stock’s open price, the price at which trading begins on that particular day.
• This price matters since it would reflect any news events or anything that may have happened to that stock during the hours the market was closed.

Step 2: Confirm if the Open Price is High or Low

• If the stock’s open price is also its minimum price that day, buy signals are given. The assumption is that the price would rise.
• If the stock’s opening price is also the highest of the day, it is a sell signal. The price is expected to fall.

Step 3: Trade Based on the Signal

• For an Open Low (OL) stock: Buy the stock expecting it to increase.
• An Open High (OH) stock: Sell or short-sell the stock expecting it to decrease.

Step 4: Place Stop-Loss Orders 

A stop-loss is an order type which can be instrumental in minimising losses, as it allows traders to set an appropriate sell price for a stock if the trade goes sideways.

• For buying stocks, set up a stop-loss below the price of buying.
• The trader sets a stop-loss above the selling price if the stock is sold.

Step 5: Close the Trade Before Market Closes 

These trades are all intraday, so they must be closed before the market closes. No stocks are held overnight, thus reducing the risk of sudden price changes.

OHOL in Action: A Practical Example

Let’s consider an example to understand how this strategy works.

Example 1: Open Low (OL) Trade

• A stock opens at ₹8,000, also its lowest price of the day.
• Traders see this as a buying opportunity. They expect the price to rise.
• They buy the stock and set a stop-loss at ₹7,800 to limit their losses.
• By midday, the stock price rises to ₹8,800. The trader sells the stock and makes a ₹800 profit per share.

Example 2: Open High (OH) Trade

• A stock opens at ₹12,000, also its highest price of the day.
• Traders see this as a selling opportunity. They expect the price to fall.
• They sell the stock at ₹12,000 and set a stop-loss at ₹12,200.
• By afternoon, the stock price drops to ₹11,200. The trader buys back the stock and makes an ₹800 profit per share.

Tools to Use for OHOL Trading Strategy

To improve their chances of success, traders use several tools and techniques when following the OHOL strategy:

1. Candlestick Pattern Confirmation

• Traders use candlestick patterns like Doji, Engulfing, or Hammer to confirm reversals.
• These patterns increase the accuracy of trade entries and exits.

2. Risk-Reward Ratio

• A good risk-reward ratio (e.g., 1:2 or 1:3) ensures that potential profits outweigh possible losses.
• This helps traders stay profitable in the long run.

3. Technical Analysis Software

• These tools help traders analyse charts to identify OHOL patterns and trends effectively.

4. Stock Scanners

• Stock scanners filter stocks that meet OHOL criteria, allowing traders to focus on the best opportunities.

5. Stop-Loss Orders

• Setting stop-loss orders helps manage risk automatically by minimising potential losses.

6. Market News Feeds

• Staying updated with impactful news helps traders make informed decisions and avoid unexpected market movements.

7. Brokerage Platforms

• Advanced brokerage platforms combine charting, scanning, and trading tools, providing a seamless trading experience.

8. Trading Psychology and Discipline

• Successful traders stay calm and avoid impulsive decisions.
• Managing emotions like fear and greed is key to long-term success.

Risks of the OHOL Trading Strategy

While the OHOL strategy can be profitable, it comes with risks that traders should be aware of:

1. Market Volatility

Stock prices can change quickly, making predicting the right entry and exit points difficult. Sudden price movements can result in unexpected losses.

2. False Signals

Not all stocks that open at their high or low will follow the expected trend. Sometimes, prices reverse quickly, leading to losses.

3. Short-Term Focus

OHOL does not consider a company’s fundamentals, such as earnings or long-term growth. This short-term focus can lead to poor investment decisions.

4. Unlimited Losses in Short Selling

If a trader short-sells a stock expecting prices to fall, but the stock price rises instead, losses can be unlimited. A stop-loss order can help limit this risk.

5. Emotional Trading

OHOL requires quick decision-making, which can lead to emotional trading. Fear and greed can cause traders to make poor choices.

Conclusion

The OHOL trading strategy is a powerful tool for traders looking to make quick profits from intraday price movements. It involves buying stocks when they open at their lowest price and selling when they open at their highest price. While this strategy can lead to significant gains, it carries risks, including market volatility and unexpected price reversals.

To succeed with OHOL, traders should use technical analysis, stop-loss orders, and stock scanners while staying updated on market trends. By following these best practices, traders can improve their chances of making profitable trades while minimising potential losses.