The opening price is the cost of a security when it first trades at the opening of an exchange. The opening price plays a crucial role in shaping the day's trading narrative. Below, we explore the opening price further, including the trading strategies traders employ with the opening price in mind.
Key Takeaways
- The opening price is the first price at which a security trades at the open.
- The opening price is different from the previous day's closing price.
- There are several day-trading strategies based on the opening price of a market or security.
How Opening Price Works
The Nasdaq uses the "opening cross" approach to calculate opening prices based on the orders that accumulated overnight. Typically, a security's opening price differs from the last day's closing price. After-hours tradinghaschangedinvestor valuations or expectations forthe security.
Factors that Can Affect the Opening Price
After the market closes, corporate announcements and other news can change investor expectations and the next day's opening price.Some investors may try to buy or sell securities when large-scale disasters occur after hours.
Not all orders are executed during after-hours trading. There is much less liquidity during this time, producing wider bid-ask spreads. This makes orders unattractive because it's more challenging to complete a transaction at a predictable price, and limit orders often won't be filled.
When the market opens the next day, this large amount of limit or stop orders—placed at prices different from the prior day's closing price—causes a discrepancy between supply and demand. This causes the opening price to move off the previous day's close toward prices corresponding to the overnight changes.
Predicting the Next Day's Opening Price
While predicting stock prices has led to financial ruin for even the best investors, there are some ways to gauge a market's opening direction.
The most obvious is to review the after-hours or premarket activity. Some investors trade shares outside the stock market's regular trading hours, though the volume traded is almost always lower. If a stock increases in value after hours and there's no significant news overnight, there's a good chance the stock will have an opening price above the previous day's closing price. The same applies, of course, if it decreases overnight.
Premarket trading happens before the market opens, so the price at which premarket trades occur can also be a helpful way to predict the opening price.
Many investors also review what's happening in international markets to gauge how the opening will go. Trading hours vary from country to country but typically align with regular work hours. For example, in Japan, trading occurs from 9 a.m. to 11:30 a.m. and 12:30 p.m. to 3 p.m. local time, that is, it opens at 7 p.m. and closes at 1 a.m. Eastern time.
While many factors influence the prices of stocks across different markets, if another country's markets rose while the American stock market was closed, investor sentiment is often that the American market is likely to open higher than its closing price.
Opening Price Trading Strategies
There are several day-trading strategies based on the opening of a market. When the opening price is quite different from the prior day’s close, thatcreates aprice gap. Day traders use a strategy known as the “gap fade and fill.” Traders try to profit from the price correction that usually occurs when there’s a sizable price gap at the opening.
Another popular strategy is to fade a stock showing strong premarket indications contrary to the rest of the marketor similar securities. When a disparity is present from premarket signals, a trader waits for thestock to move at the open, going against the rest of the market. The traderthen takes a position in the stock in the market’s general direction when the momentum and volume of the initial contrasting stock price movementdiminishes. When done correctly, these are high-probability strategies designed to achieve quick, small profits.
Opening Price Example
On Jan. 10, 2024, the opening price for Apple (AAPL) was $184.70. The stock rose to a high of $186.36, but it closed at $186.19.
Can You Buy A Stock at Opening Price?
Yes, it's possible to buy a stock at its opening price. If you place a market-on-open order to buy a stock before the market opens, you'll buy shares at the opening price.
What Is the 10 a.m. Rule?
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour. For example, if a stock closed at $40 the previous day, opened at $42 the next, and reached $43 by 10 a.m., this would indicate that the stock is likely to remain above $42 by market close.
Are There Strategies For Trading Based on the Closing Price of a Stock?
Yes, several strategies are used that focus on the closing price of a stock. The closing price—the last price at which a stock trades during a regular session—is the focus of the end-of-day trading strategies, which involves deciding trades based on the price moves at the end of the trading day. Traders look for signals from the closing price to predict the next day's market direction. A prominent method is the closing price reversion strategy, where, if a stock's closing price deviates significantly from its historical average, traders try to profit should it revert to the mean. Closing price breakout strategies involve looking for stocks whose closing prices have broken out of a particular range. For instance, a breakout above a resistance level could indicate a bullish trend.
The Bottom Line
The opening price for a stock is the price it trades immediately after the stock market opens at 9:30 a.m. Eastern time. It can be close to the price at the previous day's market close or shift significantly because of overnight news. Knowing the opening price for a stock and how it changes because of overnight trading is crucial information, especially for those trading early in the day.