The close price is the price a market ended the session at, the last transaction before the market closes for the day.
Let’s say stock XYZ opens at $100, increases to $105, decreases to $98, and closes at $103. If so, the closing price of the session is $103.
The closing price is the most important price of any session. Think of it this way, if stock XYZ opens at $100, and then trades up to $115, we would interpret the substantial increase in price as bullish, right? Well, what if XYZ ends the session with a close of $98? There was strong buying pressure intrasession, however, selling pressure proved stronger by the end of the session.
Figure 1.1 Close Price Example
Generally, if the close price is lower than the previous session’s close price, selling pressure overpowered buying pressure. If prices close higher than the previous session, buying pressure overpowered selling pressure.
Many traders evaluate the performance of a stock based on sequential closing prices. A large portion of trading decisions are predicated on the closing price of a stock.
If you are backtesting a trading system, it’s best to backtest hypothetical trading decisions at market close. Indicator measurements and price moves might occur intrasession, but those measurements and price moves might not be true when the market closes. Therefore, a position would be opened when a signal wasn’t actually generated. This might seem like a hindrance; if you can get in at a better price, than you should do so. However, you can simply build a trading strategy/system that only opens positions at close, and closes open positions at opening bell or closing bell. You can build an efficacious system without entering the moment a signal is given. In addition, the worst thing a mechanical trader can do is enter a position when a signal is given intrasession, but that signal is rescinded at close.
Intrasession price fluctuations are often deceptive and unpredictable. Think of the shooting star or hammer candlestick.
Figure 1.2 Intrasession Deception
Figure 1.2 shows a hammer candlestick. During the session, prices traded substantially lower. During the down move, novice traders might be deceived into thinking a huge downside price move is imminent. However, prices close near the opening price of the session; demand exceeded supply at lower price levels. Therefore, the high and low price of the session were a bit misleading, and if your system generated a bearish signal, that bearish signal may have been rescinded at the closing bell – you could be stuck in an unfavorable position.
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