Day Trading Comparing Yesterday

Today is a new day right, so why should I bother looking at yesterday? Is there any use at all in looking at what the market did and where, during the previous day? YES! Markets constantly shift from balance to imbalance, consolidation ranges to directional exploration. The most relevant and new information we have about the possible acceptance of price is by comparing the open and the market’s reaction to yesterday’s range.

So the question is what constitutes acceptance. Depending on which methods you use to analyze the markets, the answer to this may vary. Broadly speaking, it is persistent trading of a market at the same prices as were previously traded. So if the market spends a reasonable amount of time at these prices without encountering any major activity to move it to new prices, this can be considered acceptance to some degree. This doesn’t necessarily mean that price won’t deviate from accepted areas, just that the trading activity is more likely to be balanced than imbalanced, thus reducing range potential.

The three different positions indicated above clearly highlight whether on market opening, the perception of value has changed. If the market opens near the middle(or ideally near the most traded price) of the prior day, it is likely that there is little difference at least initially and unless information comes out which creates an imbalance, trading can overall be expected to be somewhat balanced around the same range. If the market opens towards an extreme or above/below the entire range from the prior day, the immediate possibility is that something may have already changed. The key is to look for acceptance or rejection of the new prices. If the market opens outside of the prior day’s range, does it spend time trading there or is price quickly moved back into the known area of the prior day? Acceptance gives rise to (and could in itself be) a further move in the direction of the change. Rejection and a move back into the prior day’s range followed by acceptance of that range, could well give rise to a further move into the same range. After all, if the balance is still intact, then prices on the extreme will be viewed as expensive or cheap depending on which end price sits.

So why does that matter to you and your strategy? Comparing the open to yesterday’s range can give us all an early indication of whether anything has changed and so what the directional bias may or may not be. With this knowledge in hand, setups of any kind occurring in the same direction, stand a greater chance of achieving a successful outcome.