The Importance of the Closing Price

[Soultrader 12]

Amateurs control the open. Professionals control the close.

 

In order to understand the reason why professionals and insitutional traders control the close, you must first understand the VWAP or volume weighted average price.

 

VWAP is defined as the average price of the stock traded for the day when volume is weighted.

 

Insitutional traders are compensated when they are able to beat the VWAP. They will usually hold onto inventory until the end of the day so they can improve their VWAP. This is not always the case, but because they trade in massive volume there is a good chance that they are able to get fills that will improve their average price.

 

It is common to see a light pullback during the doldrums after a morning rally, then a continuation of the trend into the close. If an institutional trader has buy orders stacked but is unable to get a fill during the morning rally, he will be forced to buy pushing prices higher into the close.

 

Source: The Market Maker's Edge by Josh Lukeman

[luke24.5 10]

Do you reccomend Lukeman's book? That seems to be some info worth knowing.

[Soultrader 12]

It does have some good information worth knowing. If you are a stock trader it may be helpful. I read this book a few years ago and found it relevant back then. I would say if you have at least 1-2 years in the markets you may crave for some more advanced material.

 

He does go over key market makers and some interesting day trading strategies. However, since I trade the index futures I did not find alot of materials useful. Its a real basic book.... alot of the material have been mentioned repetitively through different authors. I have yet to read a book that can beat Mind Over Markets. Just my two cents.

[luke24.5 10]

MOM has been most helpful to me also.

[Stockaddict 10]

So basically the close is more important than the open?

[Soultrader 12]

  Stockaddict said:

So basically the close is more important than the open?

 

I would not necessarily add more weight to another. They are both important to understand market concept.

 

The opening price shows any changes in market conditions from the previous days close. If the opening price is higher than the closing price, we have a gap up and shift in market sentiment. The greater the distance between the close and the open, the greater the change in market sentiment.

 

You also need to consider if price has gapped above/below value and above/below the previous day's range. This indicates market imbalance. Therefore the opening price is fairly important as well.

[Follow The Trend 10]

While there are a lot of good comments above, I am not sure it is really as straight forward as some think.

 

I agree that the first stock price of the day reflects the perceived demand for the stock at the open, and perhaps a little bit of completing orders from the day before. However, it is a little simplistic to say that the closing price is so predictable, because there are many factors to consider.

 

A lot can happen to the momentum of a stock from start to close.

[Soultrader 12]

Sorry for the confusion. I did not mean to say the closing price is predictable. Nothing is predictable in the markets. What I meant to point out was that amateurs control the opening while professionals control the close.

[chaostrader 11]

  Follow The Trend said:

While there are a lot of good comments above, I am not sure it is really as straight forward as some think.

 

I agree that the first stock price of the day reflects the perceived demand for the stock at the open, and perhaps a little bit of completing orders from the day before. However, it is a little simplistic to say that the closing price is so predictable, because there are many factors to consider.

 

A lot can happen to the momentum of a stock from start to close.

 

 

Yes, alot can happen from the opening to close. However ,even if the range was 10 S&P points if the market closed half a point from the open, this indicates a neutral market. Neither the bulls or the bears were victorious.

[Follow The Trend 10]

Hi Soultrader

 

I think you are right in many ways about amateurs having a big impact on the opening.

 

How many times do we see stocks marked up before the official open, on good news, and early buying from "private investors". After the early buying has slowed, many stocks seem to go into reverse and encounter "profit taking".

 

Then later in the day it often emergers that an institution has been dripping feeding stock out, to fill buying demand.