I would like constructive criticism on my scalping strategy to trade at the open. I will select Nadsaq - 100 stocks and wait one minute after the opening. I will look for stocks that go either straight up or down from the open then I will wait for a few ticks in the opposite direction and place a trade in that direction with a exit order a few cents away. For example: If Goog opens at 490 goes straight to 493.50 then a minute or two later at 493.50 ticks to 493.25 I would short Goog at 493-493.25 and cover at a quarter lower than I shorted. I feel like this should be a high-probabilty strategy for consistent scalping at the open. If my order to cover does not get hit and Goog moves more than, for example, $1.00 away I will get out of the trade immediately. What are the pitfalls of this strategy? I learned this idea from a poster on the Tradestation boards. I have watched for over a month now and it seems like it would work consistenly on many Nasdaq - 100 stocks. I would appreciate input on the weaknesses in trading this way and any improvements to this strategy that can be offered such as days that this strategy should not be traded and so on. Also, would INET be a good ECN to use for this type of strategy? Mike
I'd say there are numerous pitfalls to the strategy. First off, deciphering a 25 cent pullback in Google seems almost impossible. It would be even more difficult at the open. Assuming you could do that or traded a different stock there are still some problems. You are planning on allowing your losers to be more than four times your winners. I say more than four times because you said you would exit after 1.00 loss was hit which means you will get some slippage. Your winners are targeted for 25 cents. I'm not going to say a number for a risk/reward ratio, but with that ratio, you would have to win on more than 80% of your trades to just break even. If you did 10 trades and won on 8 of them you would gross 2.00 profit. Your two losing trades would equal -2.00 without slippage. Add in commissions and slippage and you lose. If you think you can win on 90-100% of your trades then go for it. Otherwise, make some changes.
All your questions except for the ECN one can be answered by means of backtesting. Get a good software package, get N100 tickdata for a timeframe of a minimum of 1 year and get to work.