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Why are open and close prices important for traders?

When it comes to trading the financial markets, there is nothing more important than the price chart itself. From the price chart, all other types of indicators are derived. Traders very well know that there are four kind of prices:

  • Opening price (the price at which a security opened during the start of the session)
  • Closing price (the price at which a security closed during the end of the session)
  • High price (the highest price reached during a trading session)
  • Low price (the lowest price reached during a trading session)

Each of these price levels reveals important information. But among these four, the opening and closing prices are the most important of all. They can reveal a lot of information about the market sentiment.

The opening and closing prices are also important in some aspects such as being used in calculating the indicator values or even as simple as drawing trend lines or horizontal support and resistance levels.

Whether you are a trader or an analyst, the opening and closing prices are the most crucial. These reference points helps market watchers to understand and gauge the strength of the trends and also what the general trading sentiment is hinting at.

Among these two (the opening and closing prices), the closing prices are the most important. This is simply due to the fact that it is important to see where price closed during a trading session. In other words, did price close above its open or below its opening price.

Why are open and close prices so important?

A bullish or a bearish candlestick pattern is simply derived from these two price points.

It is not very often that you come across the highs and the lows being used as the reference points. Although they might be used, they are a lot less significant. This is because the high and low prices simply add to the noise.

A high or a low occurs when buyers or sellers overwhelm the other party. This leads to prices rising to session highs and lows. But eventually when prices retreat or pullback, they create the wicks (known in candlestick charts) as the high and low prices of the day.

The highs and lows simply signify the session volatility in the instrument being traded.

Before the advent of electronic trading, closing prices were the only price published in newspapers. Even today, the end of day data (EOD) is often displayed with the session’s closing price. This signifies the importance of this price level in trading.

Even many technical indicators make use of the closing prices. Take for example the moving average indicator. It calculates the closing price values and plot the average closing price for the specified period of time.

Is a line chart or a candlestick chart better for closing prices?

The obvious question that comes to mind is what type of a price chart to use. Most commonly, the line chart is associated with closing prices. This is because, the line chart takes into account only the closing prices.

But the candlestick chart is also useful as it can show both open and close prices. This way, traders are able to tell when price closed bullish or bearish. It can also help in understanding the market sentiment.

The line chart is useful when you want to plot support and resistance levels or trend lines for that matter. The chart below shows a line chart with such an example

01 Line chart

Example of a line chart for plotting support and resistance and trend lines

Once the levels are plotted, you can then switch back to the candlestick chart to get a better context of the market price action.

02 Candlestick chart

Candlestick chart with support/resistance levels drawn from a line chart

As you can see in the above candlestick chart, once the support and resistance levels and trend lines are plotted using the line chart, it gets a lot more clearer. Using this information, combined with the candlestick price action patterns, you can easily now be able to see the most important price levels on your chart.

In conclusion, closing prices are no doubt the most important price levels in a price chart. Using closing prices can give you better clarity of what the markets are doing, while at the same time it can help in cutting out the market noise as well.

Read 760 times Last modified on Sunday, 10 May 2020 13:58