2 Simple Indicators for Day Trading
If you trade stocks or stock indices (or related products) here are two very simple indicators which will help you decide in which direction you should be trading.
Open Price Indicator: Current price – Open price
The Open Price Indicator (OPI) is a simple calculation that lets you know whether buyers or sellers are stronger during the day.
If the Current price is above the open price (positive OPI), the buyers have the advantage.
If the Current price is below the open price (negative OPI), the sellers have the advantage.
Ideally trade in the same direction as the OPI; if OPI is positive only take long positions when your entry signals occur. If the OPI is negative only take short signals when they appear.
The OPI acts as a filter. It lets you know in which direction you should be taking trades.
When the OPI flips from positive to negative, or negative to positive it can act as a trade signal. Buy when the OPI goes from negative to positive; sell (buy puts) when the OPI goes from positive to negative. Finding the exit will be up to you.
Net Price Indicator: Current price – Prior Close price
The Net Price Indicator (NPI) is another simple calculation which shows whether buyers or sellers are in control from one day to the next. The last closing price was the consensus price for traders yesterday. If the current price is above the prior close (positive NPI) it shows buyers are in control. If the current price is below the prior close (negative NPI) it shows sellers have stepped it up.
Ideally trade in the direction of the NPI; if NPI is positive only look for long positions; if the NPI is negative only look for short positions.
When the NPI flips from positive to negative, or negative to positive it can act as a trade signal. Buy when the NPI goes from negative to positive; sell (buy puts) when the NPI goes from positive to negative. Finding the exit will be up to you.
Combining the Indicators
The greatest confirmation comes when you are taking day trades in the direction of both OPI and NPI. When OPI and NPI are positive it shows that the buyers are strong and pushing the price up since the prior close and since todays open. When both these indicators are positive, your primary focus should be on finding long positions based on an established strategy.
When both the indicators are negative, your primary focus should be on finding short (put) positions based on an established strategy.
Except for when the indicators flip from positive to negative, or vice versa, these indicators are not trade signals. They simply tell you in which direction you should be trading.
When using the indicators for trade signals, look for confirmation. If the one indicator moves from positive to negative, indicating a sell, the signal is stronger if the other indicator is already negative or also crossing into negative territory. When an indicator crosses from negative to positive, indicating a buy, the signal is stronger if the other indicator is already positive or also crossing into positive territory.
The Final Word
NPI and OPI give you a quick assessment of how the price is performing compared to yesterday’s close and today’s open. They show you which side of the market is most favorable for extracting a profit–the long side or the short side. Finding an entry and exit, as well as controlling risk is up to you. The indicator does provide the occasional trade signal when one of the indicators flips from positive to negative, or vice versa. Ideally use the indicators in combination, as signals are more powerful when both indicators confirm each other.
