Many of the top hedge fund managers onWall Street have written books, sharing with readers stories and broad ideas about theirinvesting philosophy, but there's one Wall Street titan I like to follow that has gone a step further.
This man has shared the methods and research-driven strategies he's used to climb to the top of thehedge fund world. And I think investors could learn a thing or two from what's made him so successful.
I'm talking about Toby Crabel, the well-knownhedge fund manager of Crabel Capital Management, which has more than $3 billion in assets under management.
Crabel's book, "Day Trading With Short Term Price Patterns and Opening Range Breakouts," was written before he found success, but it contains several highly effective methods still used today. This book is no longer in print -- the remaining copies can sell for more than $1,000 when it rarely appears on eBay. Personally, I have learned a great deal from Crabel's book.
Most intriguing is his opening range breakout ( ORB ) strategy.
The opening range is the first 15 minutes of trading. With an ORB, the investor enters the position only if the price rises above the high of the first 15 minutes. Several complex mathematical formulas have been developed to nail down the optimal level to enter after the breakout, but it boils down to buying above the ORB or selling below it.
Here's a simple example. Imagine a 15-minute bar orcandlestick chart. This means that one bar or candlestick is created for every 15 minutes of time. Referencing thestock market , the first 15-minute bar or candle would form between 9:30 a.m. and 9:45 a.m. EST. So, if the price moves above the high between 9:30 a.m. and 9:45 a.m. EST, by the pre- determined parameters, it is a signal to enter the trade on the long side.
Next, switch to a one-minute bar or candlestick chart with the high and low of the first 15 minutes marked with horizontal lines across the chart. Then, wait for a full one-minute green candle to close above the upper line, or a full one-minutered candle to close below the lower line.
When one of these two scenarios occurs, go long on the break above the upper line, or short on a break below the lower line. This is ORB trading at its most basic.
While the ORB strategy is based on the opening trading range, any high and low of a stock price can be used as the range. You can apply the strategy by locating a stock trading in a tight range on the daily chart, then drawing a horizontal line at the top of the range and one at the bottom, creating a channel.
When the stock closes above the upper line on the daily chart, enter long and then use the line as the initial stop-out level to protect your capital in the event the breakout fails. If you are looking to short, enter the trade short upon breaking the lower line with the same parameters as entering long.
Here's an example of a winning breakout trade using this method:
1. Coeur d'Alene Mines Corp. ( CDE )
This mining stock has been trading between $19.50 and $18 since Feb. 19, 2013. Entering on a breakout close above the upper line on the chart is a classic breakout entry and therefore makes sense for technical trading.
2. Bank of America ( BAC )
Bank of America is aprime example of a stock that could break out or break down very soon. A breakdown is the opposite of a breakout. Shorting on a breakdown below the lower line or buying a breakout above the upper line is how you would trade this stock.
Risks to Consider: Breakouts and breakdowns can fail easily. This is why it's critical to always use stops when investing. Ideally, I prefer to use the breakout line as the initial stop level. Technical trading has its limitations as it takes into account price only and ignores the fundamentals.
Action to Take --> Entering Bank of America on a breakout or breakdown and Couer d'Alene Mines on a breakout makes technical sense.
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