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Profiting From Volatile Markets With OOPS

03/12/08 08:51:47 AM
by Mike Carr, CMT

This famous Larry Williams trade setup can be especially profitable when markets are making wide intraday swings.

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"OOPS" is a trading strategy that market expert Larry Williams has written about extensively. The OOPS signal trades gaps, going against the direction of the opening gap. It is called thus because, according to Williams, when a market reverses an opening gap, many traders with losing positions say "Oops" and exit with a small loss.

The rules are simple. For long positions, when a market opens lower than the previous day's low, place a buy-stop at the previous day's low. Shorts are initiated when a market opens higher than the previous day's high by placing a sell-stop at the previous day's high. Trades can be exited on the close, or held overnight to maximize profits. A stop-loss should always be used.

The OOPS signal is based on market psychology. Often, news will cause a market to open with a gap. If there is no momentum behind the market, there won't be any follow-through action on the news, and prices will reverse. Traders often insist that most of the time the opening price will be near the high or low of the day at least 70% of the time. This means the OOPS trade should offer an excellent reward/risk ratio.

Can something this simple really work? Williams found the strategy to be very successful in the futures markets. The leverage of futures helps increase profitability, but it can be employed in any market. We tested against the SPY exchange traded fund (ETF), since that is the trading vehicle of choice for many readers. With a stop-loss of $1,000 and using Williams' first profitable opening exit strategy, the trade delivers 81% winners, and it is equally successful from the long and short side. Testing with QQQQ is equally successful with startlingly similar numbers.

With large intraday swings becoming common in the stock markets, the OOPS strategy is a great starting point for traders to look for profitable trading ideas. Variants of this strategy can be developed to personalize the idea, and few strategies can reliably help identify the market bias 80% of the time.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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