Price on the open

The first piece of data used to construct a candlestick is the opening price for the day. For stocks, in most cases, it's the official opening price on a specified primary exchange.

Recording an opening price on a candlestick

On a single candlestick, the thin vertical line is the wick, and the thick part in the middle is the candle. The opening price on a single candlestick will always be either the top or bottom of the candle, and it's created on the chart using the price scale on the chart's vertical axis. A hollow (white) candle is bullish, meaning that the opening price is lower than the closing price. (See Chapter 2.) If you see a hollow candle, the bottom of the candle is the opening price. Conversely, a filled-in (black) candle is bearish, meaning that the opening price is higher than the closing price. In that case, the top of the candle is the opening price.

Dealing with the challenges of pinning down an opening price

Because many securities are now trading on multiple exchanges or electronic trading networks, pinning down an exact opening price can be difficult, which makes constructing a candle a difficult endeavor.

For example, I was recently trying to trade a stock on which very significant — and misinterpreted — news came out before the opening of the trading day. The stock had closed the day before at $48 per share, but was trading on one of the electronic communication networks (ECNs) two hours before it was to open on the New York Stock Exchange at $45 per share. Over the next two hours, the breaking news was better understood, and the stock started to trade higher. It actually opened at about $51 per share. Although several thousand shares traded between $45 and $51 in the two hours leading up to the opening price, the official open for the day was $51.

For futures contracts on commodities — agreements between two parties to buy or sell a certain product on a predefined date (see the nearby sidebar, "Focus on futures" for more details) — attempting to determine the opening price for a day can be even more difficult. Many futures markets now trade both electronically and on a trading floor. A perfect example is Japanese Yen.

What's the stock market?

When most people think of the stock market, they picture stock traders in brightly colored jackets shouting and hand signaling orders in a giant room. This is actually how the commodity markets function. The stock market, or at least the floor of the New York Stock Exchange (NYSE), is more like a giant bank lobby with each stock having a particular place or post where transactions for that stock take place. The person in charge of manning this post is known as the specialist, and his job is to facilitate trading of a particular stock between the multitudes of buyers and sellers in an orderly manner.

A specialist takes all the buy-and-sell orders and attempts to match them up. In some cases, when an abundance of sellers exists but not enough buyers, the specialist may help with orderly trading by buying shares from the sellers. When there are several buyers and not enough sellers, the specialist may act as a seller to keep the market orderly. Specialists also assimilate buy-and-sell orders before the official market opening to determine an opening price, and they do the same thing on the close.

When I began my career 15 years ago, virtually all stock trading in the United States was done either on the floors of the NYSE or the American

Stock Exchange (AMEX), or through a network of brokers known as the National Association of Securities Dealers Automated Quotation System (NASDAQ). If I wanted to buy shares of IBM, which traded on the NYSE, I called a broker and gave him an order. He forwarded my order to someone working on the exchange floor, or in some cases directly to the specialist. If I were to purchase shares of Microsoft, (symbol MSFT), which traded on the NASDAQ, I called a broker who either traded directly with me, matched me with a seller, or traded with another broker through the NASDAQ market.

Today there are multiple venues for those stocks traded on the listed exchanges and those on the NASDAQ. The broker I use for my personal stock trades has an automated feature that automatically selects the best market for the order I enter. I never know anymore if my orders go to the exchange floor, and as time goes on, fewer and fewer of my orders make it there. Instead, the orders are traded over an electronic communication network set up for trading stocks without using the primary exchange or the specialist. Brokers and large institutions use these networks to trade stocks without sending the orders to the floor of the primary exchange.

Yen futures trade on the Chicago Mercantile Exchange (CME) and on their corresponding electronic platform, called Globex. The pit for the CME opens at 7:20 a.m. central time and closes at 2:00 p.m Monday through Friday. But the Globex trading hours run from Sunday at 5 p.m. central until 4:00 p.m. on Friday, with only an hour break each afternoon. So how do you determine the open? Note: These hours are accurate as of December 2007 and subject to change.

For such a convoluted situation, I use the pit data for analysis purposes, but since the most volume is traded during the hours that the pit is closed, I always have to reevaluate what I consider to be the open. For some other examples of futures contracts that have both pit trading hours and electronic hours, see Figure 3-1.

Chicago Board of Trade - ECBOT

Ele. Open Ele. Close

Agricultural Corn

Soybeans Wheat

Interest Rate 2 Year 5 Year 10 Year 30 Year

Index DJIA

CME - Globex

Pit Open Pit Close

Figure 3-1:

Futures contracts that have both pit trading and electronic hours.

13:15c 13:15c 13:15c

15:15 c

CME - Globex

15:15 c

Ele. Open

Ele. Close

Pit Open

Pit Close

Index

S&P 500 Index

17:00 c

16:00 c

8:30 c

15:15 c

NASDAQ 100 Index

17:00 c

16:00 c

8:30 c

15:15 c

Nikkei 225 Index

2:00 c

16:30 c

8:00 c

15:15 c

Russell 2000 Index

17:00 c

16:00 c

8:30 c

15:15 c

S&P MidCap 400

17:00 c

16:00 c

8:30 c

15:15 c

Currency

Australian Dollar

17:00 c

16:00 c

7:20 c

14:00 c

British Pound

17:00 c

16:00 c

7:20 c

14:00 c

Canadian Dollar

17:00 c

16:00 c

7:20 c

14:00 c

Euro FX

17:00 c

16:00 c

7:20 c

14:00 c

Japanese Yen

17:00 c

16:00 c

7:20 c

14:00 c

Mexican Peso

17:00 c

16:00 c

7:20 c

14:00 c

Swiss Fran

17:00 c

16:00 c

7:20 c

14:00 c

Interest Rate

Eurodollar

17:00 c

16:00 c

7:20 c

14:00 c

Libor

17:00 c

16:00 c

7:20 c

14:00 c

Commodities

Feeder Cattle

9:05 c

13:00 c

9:05 c

13:00 c

Pork Bellies

9:10 c

13:00 c

9:10 c

13:00 c

Lean Hogs

9:10 c

13:00 c

9:10 c

13:00 c

Live Cattle

9:05 c

13:00 c

9:05 c

13:00 c

NYMEX - Globex

Ele. Open

Ele. Close

Pit Open

Pit Close

Energy

Crude Oil

18:00 e

17:15 e

9:00 e

14:30 e

Gasoline Futures

18:00 e

17:15 e

9:00 e

14:30 e

Natural Gas

18:00 e

17:15 e

9:00 e

14:30 e

Heating Oil

18:00 e

17:15 e

9:00 e

14:30 e

Metals

Gold

18:00 e

17:15 e

8:20 e

13:30 e

Silver

18:00 e

17:15 e

8:25 e

13:25 e

Copper

18:00 e

17:15 e

8:10 e

13:00 e

Aluminum

18:00 e

17:15 e

7:50 e

13:15 e

In Figure 3-1 you see that, for futures contracts, the actual opening price for a session can be hard to determine. One good solution is to use the opening price for the first trade during the pit session.

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