Closing Prices of Bars

If one looks at a daily price chart, he or she will probably notice that some bars opened close to their lows but closed near the middle. Each of those bars was probably a strong bull trend bar, with the last price matching its high at some point during the trading day. If a trader goes long, assuming that the bar will close at its high and actually buys near the high, but the candle instead closes in the middle, the mistake will quickly become apparent.

Smaller time frames have some issues

There are some common issues that occur on smaller time frames. One of them arises when a trader tries to pick a bottom in a strong trend. The trader will usually see a lower low after a trend line has been breached and will want to see a strong reversal bar forming on the chart, especially if the bear trend channel line has been overshot. Let us imagine that the bar begins to appear as a strong bull reversal bar by the fourth minute. Prices tend to remain close to the high of that bar for several seconds, which lures more traders who are willing to trade counter-trend and enter early in order to minimise their risk exposure. They do so because they will probably place their stop-loss below the low of the bar. However, with only a few seconds remaining before the bar closes, the price declines and the bar closes on its low. As a result, all those early buyers who were willing to risk a few pips less end up losing considerably more. They are trapped in a trade they should never have entered.

Such situations may occur many times during the day when a trader assumes that a possible signal bar is forming before the bar itself closes. The trader intends to go short below a bear reversal bar that has a few more seconds left before it closes. The price at the moment is close to the low of the bar. A moment before the bar closes, the price moves a few pips away from the low and the bar closes off its low. This suggests that the reversal signal is weakening and the trader should not enter the market based solely on expectation and hope.

Another issue arises when a trader is trapped out of a good trade. Let us imagine a trader who has just gone long and whose position shows an open profit of 3-5 pips, but the price has not yet offered 6 pips. On a larger time frame, moments before the bar closes, the trader decides that this is a strong bear reversal bar. He or she immediately moves the stop-loss to 1-2 pips below this bar, but just before the bar itself closes, the price falls and triggers the stop, after which it rises a few pips in the final three seconds before the close. During the first minute of the next bar, the price continues to climb; some cunning traders record partial gains, but our trader abstains from action. Poor discipline causes the trader to be trapped out of a good position. Had he or she stuck to the trading plan and left the original stop-loss in place until the entry bar closed, a profit would have been realised.

There is something else worth noting. Closing prices of bars are relevant because many institutional traders base their decisions on value, not on price action. The charts they use are line charts, based on closing prices. These traders would not examine charts at all if the charts did not affect their decisions. If they do consider the charts, the only element they will look at is the closing price; thus the importance of this price becomes greater.

Final words

Trading on smaller time frames enables you to place smaller stops but also increases the chance of being stopped out of a good trade. Smaller time frames reduce the risk of trading but also reduce the probability of success. On a 1-minute chart, the number of trades is usually larger (compared with a 5-minute chart, for instance), which adds to the risk of missing the best trades. This leads to lower overall profitability for 1-minute trades for many market participants.

Stop runs on a 1-minute chart are more common than on the 5-minute chart at key reversals, and cunning traders look to take advantage of them. They usually aim to trap weak bulls (bulls with limited capacity) out of the market.

All in all, it is better to examine and trade from a single price chart, because at times price movement develops too rapidly for a trader to decide quickly where to position himself or herself when looking at two different time frames and trying to harmonise contradictions.