Talking about trading systems, Larry Williams’ OOPS system still remains to be one of the most popular trading systems today. Larry presented his short term trading methodology in his famous book “How I Made One Million Dollars Trading Commodities”.
Today, a lot of different variations of this system are used worldwide by professional traders.
The OOPS pattern, as discussed by Larry Williams, is observed when:
The daily bar opens below the previous day’s low.
Or when the daily bar opens above the previous trading day’s high.
The theory behind this pattern is very simple and logical. Larry believes that non-professional traders check common charts at night and enter their orders for the upcoming day.
On the other hand, professional traders wait for the trend to be actually developed in the day and place their orders accordingly at the daytime.
Hence, if the market opens considerably lower or higher than yesterday's range, it is an indication of the panic of non-professional traders. This provides a great opportunity to professional traders to use the non-professionals’ emotions against them by placing a contrarian trade and earn profits.
Basically, it is a gap trading strategy which means that it is based on fading the direction of the opening gap.
What happens is that non-professional traders usually overreact to some important news even before the market opens and create the gap when the market opens (especially in case of stocks, commodities or stock indices). This gap is the result of the opinion of the average crowd.
Soon, these traders notice that they overreacted in response to the initial event or news. At this point, the traders realize their mistake and reevaluate their position. This causes prices to reverse and a movement in the opposite direction occurs.
This trading system provides a lot of valuable information related to buying and selling in the FOREX market, even though gaps occur rarely since it’s a 24-hour market. However, weekend gaps at the open are quite common in the FOREX market, so the OOPS trading system will work best on daily and weekly charts.
The OOPS buy strategy is explained in the following points:
There needs to be an existing downtrend on the chart for at least a few trading sessions. This will be usually indicated by several red candles on the daily or weekly chart.
During the last stage of the downtrend, the market needs to gap down way below yesterday’s low. This gives rise to the OOPS buy signal.
As reevaluation by investors happens, the price starts rising and crosses yesterday’s low and yesterday’s close. This generates the buy signal and a long trade should be initiated here.
- The Stop-Loss is the low of the same day.
Similarly, the OOPS sell is generated according to the following pattern:
Closely observe the chart and find if there is a prolonged uptrend for at least few trading sessions indicated by white or green candles.
During the last stage of the uptrend, a gap higher should occur to beget the OOPS sell. It’s even better if the price opens much higher than the yesterday’s high.
As reevaluation by investors progresses, the price starts falling and eventually crosses yesterday’s high and yesterday’s close. A short trade should be opened once this has occurred.
- The Stop-Loss is the high of the same day.
The Larry Williams OOPS pattern has been used by numerous investors and traders and it is known to have a high level of accuracy and validity. It provides an opportunity to get valuable profits from fading the gaps.
However, it is still very important to remember that it is not a purely mechanical concept and it is possible for variations to occur in this system. Also a proper exit strategy should be defined as well.
Therefore, the best way to get started with the OOPS pattern is to use trial and error method. It is you who will have to figure out the best application of the OOPS system in different trading conditions and across different markets.