"Should I chase these trades after the open when I don't get filled?"
By Dave Mabe
Here's a question from a long-time list member, S.R. (name used with permission, lightly edited for clarity):
S.R.:
A lot of my LOO (limit on open) orders get cancelled due to not hitting the limit order, and I'm trying to figure out if it's worth chasing after the open instead. How should I determine how much to chase?
Dave:
It depends on why the order was rejected, but here's how I would think about this.
First, make sure your limit price on your LOO order is coherent based on your strategy.
For example, one strategy I trade has a very predictive rule that I discovered with the cruncher based on a minimum value for the gap percent.
Since you don't know ahead of time at what price the stock will open, I use a limit price at the equivalent of the minimum threshold for the gap percent. (That is, if it opens below that price, then the gap percent doesn't match the rules of the system.)
This is a convenient rule for this exact situation.
If you end up not getting a fill at the open (for whatever reason), but the trade is still valid (i.e., it will show up in the backtest), then there's no reason not to use a limit order during regular trading hours at the open price.
If the open price "invalidates" the trade - that is, the trade will not appear in your backtest - then I would ignore it after the open.
But...
This is a good situation for diving deeper.
Trades that are just outside your rules (like this example) are fertile ground for new, adjacent strategies.
The fact that the stock just happened to open a little below this one rule is somewhat arbitrary.
And you've got a very clean way to create a new strategy that's completely additive to the one you're trading off the open.
The first thing I'd test is trades that opened below the threshold, but immediately trades into the range of your original system.
That's a completely new universe of trades not in your original system, but will have a lot of the same characteristics.
Great question, S.R., and thanks for sharing.
-Dave
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