“Everyone is entitled to his own opinion, but not to his own facts.”
— Daniel Patrick Moynihan
The price range for any trading instrument during any single session is defined simply between its low and high price. “Today’s high for XYZ was $123.45, and today’s low was $118.18.” This data is absolute, and only its meaning can be interpreted differently.
But that’s not even half the story.
Two other intraday price points also define the session: The opening price and its closing price. Again, no special skill is required to discern this information. The first trade of the session takes place at a single price, as does the session’s final trade.
That’s still not even half the story.
So, let’s summarize what we know so far. Each intraday session can be defined with four prices: The open, the close, the high and the low. Each of these four data points can be reported as only one price. For example, no matter how much trading takes place at the session’s high, only one price defines it.
Pretty simple stuff, right? Fortunately, the greatest truths are often found among the simplest data.
Being a chartist, I live and play almost entirely in price. Technical indicators are created by manipulating those four simple data points. This can reveal trend strength and weakness, false breakouts, and turning points. Adding volume – another absolute – offers further context.
While all price is created equal, the session’s closing trade is its most important price. The intraday extremes in optimism and pessimism speak to the range of valuation among current buyers and sellers. But the closing price identifies where they finally agreed. This information can answer some basic questions: How does today’s final agreement compare to yesterday’s closing price – is it higher, or lower? Has there been a trend of rising or falling prices?
Answering those basic questions won’t tell us what to expect tomorrow. For that, at the very least, we must incorporate the range’s high and low. Now we can get answers to slightly more complex questions (see image 2): Did one extreme of today’s range probe beyond the prior session’s extreme? If so, then was today’s closing price also beyond the prior session’s extreme? Or, did today’s close reverse back in the opposite direction despite that intraday probe?
Comparing intraday ranges to prior sessions can offer context. And when it does, their closing prices can discern behavioral patterns. More meaningful questions can be answered (see image 3): Is there a trend of these sessions closing beyond the prior session’s extreme? Are sessions tending to reverse through the close after probing the prior session’s extreme intraday? Or, just the opposite, are intraday ranges narrowing from their previous sessions?
Let’s summarize again. Intraday prices define the range of disagreement between buyers and sellers, and the closing price identifies where they finally agreed. That only speaks to the individual session. But an ongoing pattern of similar sessions can depict a trend.
At some point in the pattern, it may offer a reason to act. Perhaps the trending has only recently emerged, which is a “breakout” that we anticipate will extend.
Or, the opposite. Perhaps today’s probe above an extended series of intraday highs reversed down to close under yesterday’s close, which suggests the trend is ending. If today’s opening price in this latter setup is also under yesterday’s close, then near-term price action can play-out very predictably. If this action were to develop where a previous trend had peaked, then a trend reversal becomes much more predictable (see Image 4).
Of course, we want the greatest predictability to support our decisions, so all relevant data should be considered. We already have the open, close, high and low. Let’s add volume. While the closing price identifies where buyers and sellers finally agreed, volume speaks to the original disagreement. The final agreement matters much more when many buyers and sellers are generating a lot of volume.
Volume identifies the importance of the price data. The session’s range depicts the size of the disagreement over value between buyers and sellers. But is heavy disagreement the cause of a wide range between high and low? Or is the intraday range wide because of thin participation? Price can fluctuate widely more easily when there is less liquidity. In contrast, wide intraday fluctuation is more difficult during heavy volume. Fluctuating widely on heavy volume while probing a prior trend’s extreme can identify a timely opportunity.
So important is volume that two of the most popular technical indicators are based on it: Money Flow and On Balance Volume. The latter, abbreviated OBV, was created by Joe Granville. Quite simply, the indicator adds a session’s volume to a running total if that day’s closing price was above the prior day’s closing price. The indicator also subtracts volume if the close was negative. Its determining factor is the closing price, but intraday ranges are ignored.
Meanwhile, the Money Flow family of indicators incorporates all price data except the open. Created by Marc Chaikin, it differs from OBV’s winner-take-all use of volume. Instead, Money Flow proportions the day’s volume between buyers and sellers. A ratio is created by considering the session’s closing price relative to the intraday range. Multiplying that day’s volume by its ratio determines how much buyers or sellers won the disagreement (see image 5).
Conclusions
It is difficult to imagine making any decisions without knowing the trend. Some regard for intraday ranges is also helpful, and volume offers a common denominator that values these elements. But the more profitable trading decisions can be made if each element, and their cumulative trend, is considered within the context of closing price.