During the late 1960s there was a prestigious commodities research firm named Sibbet-Hadady. Jim Sibbet and Earl Hadady were recognized as researchers providing quality information in both fundamental and technical sectors. There are only a handful of traders still around that remember these early icons of the commodity industry.

Earl Hadady was the first to allude to the importance of the opening price. Only commodity markets were included in his small pamphlet showing the opening price relationship in most of the actively traded commodity markets. The commodity markets at the time consisted of grains, meats, metals and New York soft markets (cocoa, sugar, etc.)

Hadady illustrated the opening price with scatter diagrams. These diagrams were quite impressive and showed that the opening price was near the high or low of the day about 80% of the time. This pamphlet was not for sale as I recall, but used by Sibbett-Hadady to solicit customers for their research. Few copies of Hadady’s research remain today.

It was during the late 1970s that my good friend and mentor John Hill of the commodity Research Institute began preaching to me about the power of the opening price. John’s elder son, John Jr., was a student at Duke University studying computer science. John Sr. and I had become good friends through the years and I had been a guest at John’s ranch in the mountains of North Carolina. Memories of my visit there are still vivid in my heart to this day.

John and I worked on the opening price principle by having John Jr. run sets of data on the major commodity markets over a 20 year period. We had access to the intraday data and set up some simple rules to make it easy to follow. What we found was an amazing correlation to the opening price and the high or low of the day.

As the data unfolded we began doing some data runs to see if we could define some specific trading rules. The first step was to define what the opening price was. We used the first print as shown at the open of the exchange for that particular commodity. Keep in mind that we did not have overnight trading and we did not use any data on New York or NASDAQ stocks. From this information I would later define the open as being near the high or low of the day approximately 65% of the time, and given this high or low to be nearer to less than 20% of the daily range.  This means that the low or high must open near the 20% level of the high or low.  Many times the market will exceed the opening but quickly reverse.  By using the 20% of the daily range you can still use the opening price as a trading tool.  It basically is nothing more than this – the opening price will be near the high or low of the daily range approximately 65% of the time (within 20% of the high or low).

At first glance the 65% figure does not look spectacular but it is really an amazing edge. How would you like to play a Las Vegas Casino game that places the odds of winning at better than 51% and the game also gives you the option to stop at anytime and take money off the table? This subtle difference defines the difference in gambling and speculation. Gambling requires an ‘event’ to start the game; blowing a whistle, the roll of the dice, spin of the wheel or a turn of a card. Once it occurs the participant must wait until the game is completed to know the outcome and the Casino will take a percentage for the privilege of playing.

Speculation allows you to select the game (stock, futures, and options) and you have the right at anytime to stop or continue. It is also a zero-sum game which means you are opposing another player (trader) with opposite positions (long versus short).

A positive probability in a trade outcome is an incredible edge and the opening price can give you that edge. In fact, there can be less than 50% probability on a trade and it can still make money.

To prove to yourself that the opening price can be an effective trading tool you should implement your own studies. Much can be gained by just observing the opening price each day over a series of days. Japanese candlesticks or simple bar charts can be used for this experiment. For those of you that are computer literate and enjoy programming can program a set of parameters for using the opening price. Selecting groups of stocks with different parameters such as their beta or price range is one way to approach this study. Price ranges from 20-40, 40-60, 60-80, 80-100 and those over 100 will give you more than enough samples to validate the study. Chance favors a prepared mind so large sample sizes (above 1000) have better validity than the smaller ones.

Practicality is the final test - take a pragmatic approach. If the opening price can make you money then use it in your trading. Most of our frustrations in the market come from our expectations that fail to materialize. We think the market should go one way and the market goes the other way. Great traders have the ability to change their opinion very quickly – “lose your opinion instead of your money”, says legendary trader Paul Tudor Jones.

Here are a few of the positive outcomes of using the opening price principle in your trading. First, you can maximize margin as some firms give you 10:1 margin in day trades. Second, there is never any overnight risk exposure because all trades are closed at the end of the day. Third, you can define your risk by using the previous days trading range or use a time stop on the trade. For example you will exit any trade that is against the opening price one hour after the open. Personally I find that this idea of time stops is the most intriguing part of the opening price. Asking yourself a simple question during the trading day can save (and make) you money that could have been lost.

Consider this circumstance; you are long a stock and it is midday and your plan is to day trade the stock. If the price is below the opening price and you are long, the odds of winning on the trade are less than 35%. The opposite is true if you are short the stock. This can help you decide to exit the position with a smaller loss. Good traders learn to love the losses. Losses take you one step closer to your next winning trade.

There is only one way for the opening price principle to make you money and that is to “defy human nature and do the work yourself”, a quote by Jim Twentyman.

Take some quality time and make the opening price your ally.  It can be used in multiple ways but it must fit your trading style. The positive edge is there but you must be the one to take the responsibility to prove it to yourself. It is the best kept secret on Wall Street because most traders do not take the time to study the opening price in depth.

The following simple system utilizes the opening price and should offer the day trader a slight edge:

- Determine the trading range for the first hour after the day session open.
- After one hour of trading, if the current price is below the open, look to sell short, or if the current price is above the open, look to buy long.
- The Buy Long entry price is 0.618 of the 1st hour range down from the 1st hour high.
- The Sell Short entry price is 0.618 of the 1st hour range up from the 1st hour low.
- If filled, hold the trade to the end of the day and then exit.   Trades are not kept overnight.
- A protective stop is placed at one half of yesterday's range offset from the entry price.