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Thanks for your comment, and I agree with you -- I also use a chart, several in fact, but I don't use a closing bar price as a data point, and I don't place any emphasis on an individual bar, I just use them collectively to form a picture of the flow. Pattern recognition is very important in trading, and I can often spot a pattern on my chart that resonates with me, and I use this as the basis for a trade.
This is a very balanced viewpoint and I appreciate it. Of course, my initial post is not meant to change anyone in the least, if they are using something that is working for them. It's meant more to (1) shed light on the need to use logic and reasoning in our trading decisions, instead of simply grasping at straws, and (2) encourage anyone having difficulty with a methodology that isn't working for them, to consider the "why" behind it.
This problem of blindly doing something because we have heard or, or read it, without really giving it deeper consideration, is not confined to the topic at hand, that's for sure!
Great post and thank you -- actually, I use a chart similar to this as well, except I don't plot a closing price. I will double the volume occasionally to see a more zoomed out view, and vice versa. Thanks again for your post!
To be clear, this topic started is not why you shouldn't use charts (I do use them myself) or why a 233 tick chart is useless (I use a volume chart). My argument is that, on such a chart, using the actual closing price of an individual bar to make a trading decision has no basis in sound logic.
Making decisions based on the closing price of a bar, specifically, is, in a way, similar to using a line chart (rather than candles) - it's a decision-making process based on sampled data. Maybe the only difference is that the candles also include a summarization (ie, "statistics", like the max and min over a period), while the line chart is purely sampling.
So I'd say that the value of making decisions based on the closing price - and, similarly, based on a pure line chart - is that a decision is being made on compressed data. The hypothesis is that there's too much data, and that choosing 1 data point among a tremendously large set of possible choices, will make decisions better than if the trader had to account for everything.
The actual process used to choose that data point is probably not that impactful - be it time, volume, range, etc. What's more important is what that specific sample represents in the context of the previous samples. Eg, can the trader identify an uptrend? If so, buy. Can the trader identify a reversal? If so, reverse. And so on.
Finally, I believe that while those sets of "rules" you were talking may not have an inherent profound meaning, they may be useful to help a trader utilize the summarized or sampled data he's looking it to help the decision making process. If the trader analyzes data and comes to the conclusion that, for instance, when the closing price is above xxxxxx, it's likely that the market is starting an uptrend (ie, the trader realizes that the probability distribution of the next movement is not uniform, but rather is skewed to seeing more movements to the upside than uniform randomness would suggest), well, then one can argue that there is sound logic: it's statistics.
When I think of trading, I think of it all as one big session, after all, time is a concept we came up with aswell, to describe rates of change and decay in the world around us. I feel that time is a flawed measurement given this outlook,
but the one thing I would say is that if we agree that markets move on psychology and emotion, and we also agree that psychology and emotion of the individual participants changes over time, then time must have indirect significance to the market.
Generally, I try to understand the psychology of the traders in my timeframe, and OTF traders to make a plan to enter.
I must concede however, that when I try to trade algorithmically, Ive been using the close as a condition for entry, so I would pose a follow up question,
@josh , while the close has no inherent value to me, I would argue that the fact there are market participants that make decisions based on the close causes it to have a certain level of significance (if only a little ) , What do you think ?
The close of a 5m bar is probably the most important thing of the whole bar. It's the only point that actually makes it to a line chart that a lot people will look at.
Why? Simply because the majority of traders agree with that. Trading patterns are a reflection of human behavior and in the era of computerized trading the majority of institutions have decided that 1m, 5m, 60m, daily and weekly are the charts to use. All day every day you will see that 1R and 2R targets based on these points generate pullbacks and reversals.
It's just convention. It's the same reason why meetings start at 10.00 am and not at 10:06 or that is green is good and red is a warning. These conventions help us to agree on a certain thing and form a common base for us all to look at. Remember that in trading it's a much easier route to look at what the market is doing and to copy that behavior.
That's a very good point -- there are many derivative pieces of information that, if enough entities use it as a data point (say, a 200 day MA), gains relevance, and then becomes relevant enough to drive capital decisions. So yes, if enough entities use a particular data point, I'd say that it does gain significance.
This sounds like another case of "it's important because people use it," which I think is very true. I'd disagree though, that "institutions" as a whole are watching 5 minute bar closes to make trading decisions. Some, of course. But not many, I'd wager a guess. While the "everybody does it" argument is compelling and has merit, what I've yet to hear any reason that isn't based in this being a self-fulfilling prophecy.
Let's take a common strategy -- a "reversal bar" ... let's say you use a 15 minute chart. It's 10:35, and 100 is trading. Over the next 5 minutes, the market spikes up to a previously sold area at 105 and sellers bring it back down to 100. So, on a 5 minute chart you would have a reversal bar. But, you are looking at a 15 minute chart, and you have the bar you want, but it hasn't closed yet. Is there some reason to delay (assuming no scheduled news, etc.) taking your short? Why must a rather arbitrary 5 additional minutes pass before you sell it? What do those 5 minutes do for you? What if the market trades back up to 103 at 10:45, and then immediately falls back down to 100 after the close of the bar? Or, it trades down to 97 and back up to 100? Is it logical that the last traded price at the time 10:45:00 has more significance than the one at 10:46?
Maybe your strategy even says, "after the market trades up and back down, wait for a 5 minute stall before getting short." Fine -- but why must that 5 minute stall happen at a 15-minute boundary? Time is very important, and I often get out of trades or into trades based on it. But if the trade is there, why on earth wait until an arbitrary amount of time (or ticks, or range, ...) has passed?
) , What do you think ?
