No price can help you as binary options trade understand the market better than the closing price. This article will explain you everything you need to know to make money using the closing price.
What is the closing price?
The closing price is the absolutely last price for which a buyer bought an asset and a seller sold an asset in a period. If you are using candlestick charts, as most traders do, the closing price is visualized by the upper end of the candlestick’s body for candlesticks with rising prices and by the lower end of the body for candlesticks with falling prices.
The close is the most important part of each period. For example, traders looking to generate especially valid signals when trading price formations such as candlestick formations or continuation or reversal patterns will use the closing price as the indication of a breakout.
The close is so important because, as the last price of the period, it sums up all the previous trading. All the elements that drove the market within the period – hopes, fears, expectations, and so on – have played themselves out and are now resolved within one signal price.
The closing price is especially important in a daily chart. Many day traders have invested in the asset throughout the day. As closing time approaches, they have to decide whether to hold their positions over night, which would mean they are confident the market will continue in the same direction the next day and therefore validate the days price movements, or get out of their positions, which would mean they doubt the market will continue in the same direction the next day and therefore put the days price movements into question.
How to trade the closing price
When the market approaches closing time, the price can sometimes move in unpredictable ways. There are mainly two reasons for that:
- Since the day’s closing price is used to calculate portfolio values, many professional traders’ job security depends on the closing price. Therefore, some might try to manipulate the closing price up / down to generate a higher portfolio value.
- Some day traders do not hold overnight positions to avoid the risk of unforeseen important events influencing the price over night without the trader having the chance to react to them. At the end of the day, they will therefore get out of all their positions, which can create a lot of demand or supply. Some binary options traders therefore stop trading half an hour before closing time, to avoid these irrational market movements.
There is, however, very valuable information hidden in the closing price: Since many traders get out of their positions when closing time approaches, the closing price usually is not the high or low of the day.
If the market was bullish throughout the day, most traders have invested long and will therefore create supply when they close their long positions at closing time.
If the market was bearish throughout the day, most traders have invested short and will therefore create demand when they close their short positions at closing time. Either way, the market will move away from its extreme.
You can use this information mainly to invest in a binary option, ideally a High /Low option, 15 to 30 minutes before closing time. When the market was moving up, invest in a low option. When the market was moving down, invest in a high option.
Sometimes, however, the market will not move away from its extreme and close near the high / low of the day. While you might lose your investment this case, you can easily make up for it by drawing the right conclusion from this event:
When most traders carry their positions over to the next trading day, they are confident that the market will continue to move in the same direction. This knowledge allows you to invest in a high / low option at the beginning of the next day.
To trade the close perfectly, you should have a working knowledge of simple candlestick formations and be able to distinguish between a big candle, in which case you should invest based on the close the next day, and a Doji, in which case you should not invest.