Watch How a Stock Closes

Getting an edge using technical analysis is crucial when it comes to trading. If you hold a position overnight, there is never a guarantee how the market will open the next session. If only we knew, right? Trading would be a whole lot easier and less nerve-racking. There is something I have found, however, that helps tremendously and that is watching how a stock closes on the day.

If It’s a Bullish Close…

When I am looking for a bullish or bearish directional trade, the way the underlying closes is vitally important. For example, I will enter a bullish trade closer to the end of the session if the stock looks like it will close toward the high of the day or at least in a bullish manner. I want the stock to close in positive territory as well, as in the example below. Many times, you will see the stock continue to move higher particularly if it is breaking resistance or triggering a bullish reversal.

If It’s a Bearish Close…

For a bearish potential trade, look for a bearish close with the stock closing near the low (in a bearish manner) and down on the session. I consider entering a bearish trade toward the close of the session as in the example below. This the same chart from above, but a bearish close (first red candle) was followed by another down day. Guess what has a better chance of happening after the second consecutive bearish close? Many times, the stock will continue to move lower especially if support has been broken or that bearish close has triggered a bearish reversal.

Patience Is Key

Traders are still at the mercy of how the market opens the next session. Naturally, there is no guarantee whether a stock closes bullish or bearish that it will continue in that fashion the next session. However, being patient and waiting to enter a position when there is confirmation (bullish or bearish close) gives you an edge with more odds on your side that can improve your results and profits especially for directional trades.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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