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Larry Williams And The OOPS Signal

05/31/05 12:19:20 PM
by Paolo Pezzutti

This short-term pattern provides good trading opportunities.

Security:   SPX
Position:   N/A

Larry Williams published a description of a short-term trading method in 1979, a valuable one that is based on a pattern observed often in markets. The methodology was presented in his book, How I Made One Million Dollars Trading Commodities. It is still used by many traders with varying adaptations. The OOPS signal is a gap trading method that fades the direction of the opening gap. It is named thus, according to Williams, because when a broker would report to his clients that they were stopped out, he would call them and say, "Oops, we lost."

The rules are:



- When a market opens lower than the previous day's low, a trader would place a buy-stop a few ticks above the previous day's low.
- When a market opens higher than the previous day's high, a trader will place a sell-stop a few ticks below the previous day's high.


Markets open and gap overnight, due to a reaction stemming from a news announcement or event occurrence. The gap is based on the opinions that are formed by the crowd, "savvy" traders, and active players in that market. After the open, traders could realize that the market's price had overreacted from the initial event, which caused the market to create the gap in the first place. The favorable outcome for the OOPS to work occurs as traders reevaluate the impact that the news or event had on the market's price. Prices then reverse and move back in the opposite direction of the gap.




- OOPS is based on an overnight gap with the open, for example, higher than the previous high. If the gap prints good volume due to short covers and the crowd is willing to follow the trend, the setup for the trap is ready.
- Against fresh money in the direction of the trend, professionals apply techniques to fade opening gaps. Statistics say that there is a tendency to fill gaps in the markets.
- A deceptive move could have been orchestrated to have a high/low open. After the open, prices would swiftly change direction. Deception in the markets is always behind the corner.





Entering in the opposite direction of the gap is based on a sentiment change in the market. If that does not happen, a trend day will occur and the market would gap and run. You would have professionals to cover their positions, summing up with the crowd's fresh money in a volatile and directional environment: a trend day!


The OOPS signal is based on a psychological component. On the news or event, the market gaps in one direction, but there is no momentum and followthrough action, so prices reverse. If a trader gets suckered into bullish news and buys, once the market heads lower, he would sell that position. That is the force that drives prices to move lower. Consider also that most of the time the opening price will be near the high or low of the day 80% of the time. The OOPS provides, therefore, an excellent risk/reward ratio.

Figure 1: SPY. Here's the OOPS setup in the SPY daily chart.
Graphic provided by: TradeStation.
 
Let's see some examples in Figure 1:



Case 1: The market opens lower on March 9, then bounces back going through the low up to the previous close. That is the high for the day. Prices close at their lows in a wide range down day. This is a difficult time for the OOPS signal. There is an entry buy with the price a few ticks above the previous day's low. The outcome of the trade depends very much on the management of this trade, the rules you have established to exit the trade, and the stop-loss.


Case 2: On March 15, the price prints a gap up, which is also the high of the day. The gap is filled and with an expansion day, SPY closes at its low. Perfect. After an inside day, the gap up trapped many participants. Depending on your rules, this trade could be carried for a few days with a windfall of profits!


Case 3: The next day things are not as easy. In fact, on March 16, the market opens lower, printing another setup for OOPS this time to go long. The previous day's low is 120.08. The high for the day is 120.15. If your buy-stop was only a few ticks higher than 120.08, probably you would have entered this trade at the high for the day!


Case 4: Another nice setup can be found on April 1. The market opens higher than the previous day's high. Then it prints a trend day, closing lower with an engulfing pattern.


Case 5: On May 18, the market gaps and goes! The fresh money on the market did not even allow for a tentative of filling the gap. The setup for the OOPS did not materialize.



The pattern has its validity and its statistical value. Using OOPS, you can get significant gains from fading the gap. Often, when the trade goes in your direction, you have a trend day with nice profits. The results of the pattern depend at least on money management and stop-loss rules. However, it is not a mechanical system. You can have fun trying to figure out in which conditions OOPS works best.




Paolo Pezzutti

He is the author of the book "Trading the US Markets - A Comprehensive Guide to US Markets for International Traders and Investors" - Harriman House (July 2008)

Rome, Italy
E-mail address: pezzutti.paolo@tiscali.it

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