Plenty of novice traders understand that charts are important, but it can be confusing trying to figure out which signals are important and which signals are just noise.
All technical analysts agree one of the most important signals is the closing price. However, it’s not just the closing price that counts – it’s the closing price in relation to the day’s action that really counts.
The end of the day is when the professionals play
In general terms, most technical analysts view the closing price for daily sessions as holding more importance than closing prices for, say, five-minute periods.
This is because the end of the day is when key players have to fill orders, and they’ve often made judgments on whether to enter (or sell) according to the day’s action.
Other periods, like five minute or hourly charts, are arbitrarily chosen by you and don’t provide the same level of information.
However, all markets will have certain intra-day charts that are mostly used by professionals, and, in those charts, the closing price will give you important information.
What are you looking at?
There are two important pieces of information you can get from the closing price.
The first piece of information tells us which side was in control at the end of the session. We do this by looking at the close in relation to the range. At the top of the range, the buyers are in control. At the bottom, the sellers rule.
This is important because, as we’ve discussed, the key players are usually viewed as in control at the end of the day. Also, the close of the day should be most likely to signal what will happen tomorrow.
The second piece of information tells us how committed one party is. We do this by looking at where the closing price is in relation to the open. If is it is only marginally away from the open, then there is little commitment.
But if the closing price is significantly away from the open, then this piece of information gives you a good indication the day’s trend is likely to continue.
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