The Opening Price of a Stock: How I Used It In A Trading Strategy
Last Updated on March 13, 2023
The stock market is officially open for 6.5 hours daily and has an opening and closing price for each stock. What is the opening price of a stock?
The opening price of a stock (or any asset on an exchange) is the price of a security when it opens trading on the exchange at the beginning of the trading day. As a rule, the opening price is formed using the lowest ask of the security and the highest bid in the first 30 seconds of the exchange.
At the end of the article, we provide a backtest showing the gains in the stock market relative to the opening and closing prices.
Let’s start with learning more about the opening price of a stock (or an asset):
The opening price is not the same as yesterday’s closing price
It is important to note that one day’s opening price is not necessarily the same as the previous day’s closing price of the same security. They are usually different. Fluctuations in the value of an asset can continue even when the markets are closed, and the asset is not trading (which happens often).
Let’s make a visual example by looking at the opening prices on SPY’s (the ETF that tracks S&P 500) daily candlestick chart:
- If the opening price is higher than the closing price, then a black candle is formed, which means that during the day’s trading session, there was a downward (bearish) trend;
- If the opening price is lower than the closing price, then a white candle is formed, which means that there was an upward (bullish) trend during the day’s trading session.
The opening and closing prices form the candle’s body:
Who determines the opening price
Many factors influence the opening price. Among them are company reports on earnings above or below expected, announcements of important news related to the company, investor expectations, scandals, and more. Each of these factors can positively or negatively impact the opening price, which can increase or decrease the price.
Also, the opening price is affected by the closing price of a security on the previous business day. Traders use this data and can place orders to sell or buy an asset during the premarket session. Thus, the closing price can also influence the opening price because of the anchoring bias (a typical trading bias).
Let’s say the stock’s closing price is $50. Before the start of the next trading day, a message appears that the company has developed a new product that will likely increase the company’s profits in the future. Investors will value the company more because they expect higher returns. Consequently, the opening price on the first trading day after the announcement increases to $55-60.
Why the opening price is important
The opening price may indicate a certain level to which the value of a security may return to during the day. The anchoring bias is strong.
The opening price helps determine the right moment to buy or sell a security. With its help, you can predict or build models of the possible change in the price of an asset during the day.
For example, using Japanese candlesticks, traders predict the price movement of a security. One of the essential indicators of this type of charting technique is the closing and opening price. The body of the candle indicates its ratio. If the asset’s price goes up, the opening price is displayed at the bottom, and the closing price is at the top. However, if the value of an asset goes down, they switch places.
How to predict today’s opening price
Let’s look at some methods to predict today’s opening price:
- International markets. As stock markets worldwide become more interconnected, the dynamics of trading on the Asian and European stock exchanges can influence the opening price on the US stock exchanges. Asian stock markets affect European stock markets, and in turn, all of this affects US stock markets. If the opening price opened with a gap up on the European and Asian stock exchanges, then the same thing is likely to happen on the US stock exchanges;
- Futures markets. US stock indices such as the S&P 500 and the Dow Jones Industrial Average have futures contracts traded based on their respective values. When the value of these indices increases, the value of futures contracts increases and vice versa. Unlike stock markets, futures contracts are traded around the clock, which allows, based on the trading dynamics of futures contracts, to predict the opening price in the stock market. If futures contracts for the S&P 500 and Dow Jones fell in price while the stock markets were closed, then most likely they will open with an opening price gap down (the opening price will be lower than the closing price);
- Trading on premarket. Traders can trade an hour before the stock exchange’s opening, which allows you to predict at what level the opening price of the exchange will be. If a bullish trend has formed in the premarket, then most likely, trading on the exchange will open with a price gap upwards (the opening price will be higher than the closing price);
- Sector markets. Stock indices, which reflect the economic sectors of different countries and regions, correlate. For example, European and Asian energy stock indices can predict the opening price of stocks and indices from the US energy sector. If the energy sector in Europe and Asia rises strongly, then the opening prices of stocks and energy sector indices in the US will likely be higher than the closing price.
What is a typical opening price gap for stocks? Backtest
A price gap is the difference between yesterday’s closing price and today’s opening price.
For example, if the opening price is higher than the closing price, this movement is called a “gap up”, and a “gap down” movement is the other way around. The price gap also helps traders predict the price movement of an asset during the day.
Visual example. Price gap (gap up) on the daily SPY price chart:
Gap formula: Gap = Today’s Open / Yesterday’s Close – 1.
Calculation example: If today’s open price is $55 and yesterday’s close price is $52, then the gap is 55 / 52 – 1 = 5.77%.
Up-gaps have positive values, and down-gaps have negative values.
Let’s calculate the average absolute gaps for SPY. We calculate gaps by taking their absolute values, “ignoring” minus signs, and averaging those values:
|Moving average period (in days)||Average absolute gap (in %)|
The chart below shows (lower pane) shows the absolute daily gaps (red) and the 25-day moving average (black):
In general, it can be said that gaps in the SPDR S&P 500 ETF Trust (SPY) are a common occurrence.
How to predict the next day’s open price
Is it possible to predict tomorrow’s opening price?
- Postmarket trading. Traders can trade 30-60 minutes after the close of the stock exchange and, at first glance, this allows you to predict at what level the next day’s opening price will be. However, between the closing time of the postmarket and the start time of tomorrow’s trading session, there is a significant time interval (usually it is night time), during which various economic and other events may occur that will affect the price of tomorrow’s opening and will not allow it to be reliably predicted.
Note that there is no time gap between premarket close time and today’s trading session start time (trading session starts immediately after premarket close), so it is easier to predict today’s open price using premarket than the next day’s open price using postmarket.
We trade strategies where we buy at the close and sell at the next open or close. For example, the strategy’s equity curve below buys at the close and sells at the close the next day. You only hold the position for 24 hours! It works well when exiting at the opening price as well:
You find more info about the strategy by clicking here.
Opening price returns – backtest
Many traders and investors don’t know that all the gains over the last 30 years have come when the market is closed. Thus, the return from the close to the open is positive:
The chart above shows the returns of being invested in S&P 500 from the close until the opening the next day. The average gain is 0.04%, and the annual return is 9.5%, just – slightly below buy and hold’s 9.65%.
The strategy is not tradable due to slippage and commissions, but anything more than 0.1% is, in our opinion, more than enough to offset slippage and commissions. We have provided several examples of such strategies earlier:
- Night strategies trading (overnight edges/strategies)
- How do you do overnight trading? (How to make money overnight trading)
- 4 Overnight Trading Strategies In The S&P 500 (Strategies From Close To The Next Open)
Below is the return of being invested from the open to the close (day trading):
FAQ – opening price in a market
Let’s end the article with some FAQ about the opening price:
Is pre-market price the opening price?
No, it’s not. But normally the pre-market action gives a strong indication approximately where the stock will open, especially if it’s heavy trading or wide gaps up or down.
Is the price of a stock the open or close?
They are entirely different. The close is the last official price yesterday, while the opening price is the first transaction on the official trading day. The opening starts the day, and the close ends the day.
Can you buy a stock at the open?
Indeed, you can. Brokers usually offer an order type called OPG which is an opening order. An OPG order can be sent as limit or market. If it’s a market order, it’s executed at the opening price.
If you send a limit OPG order, it is cancelled if you are not filled.
What happens to the share price after opening?
The stock continues trading with bid and ask prices. The open and close are usually different so the stock might take on many directions after the open.
Who decides what price a stock opens at?
The opening price is determined by supply and demand and normally handled by a designated market maker.
Why do stocks go up and down at the open?
Stocks gap up or down due to news during the night. This could be market news or specific news for the stock or security.
List of trading strategies
We have written over 1200 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.
The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation.
The strategies are taken from our landing page, which contains examples of a basic trading strategy.
The strategies also come with logic in plain English (plain English is for Python trading and backtesting).
For a list of the strategies we have made, please click on the green banner:
These strategies must not be misunderstood for the premium strategies that we charge a fee for: