How to Trade Stocks Using Daily Closing Prices
How to trade stocks using daily closing prices walks through the best practices, tips, and recommendations for implementing a strategy that uses daily closing prices for its signals.
If you’re thinking about giving up intraday trading and extending your time-frame or if you’re a long-term investor looking for an active strategy to manage risk, this article will help give you some ideas to think about and test out.
If you’re not sure what using daily closing prices even means, then don’t worry, we’ll start from the beginning and explain.
I’ve recorded this lesson in video format, so if you’d rather sit back and listen, click play on the following YouTube video.
What does trading using daily closing prices mean?
When we use the term daily closing prices we are referring to the final or last price a stock, ETF, or index trades at, come the end of the day.
Forget about the first six hours and twenty-nine minutes in the stock market and only pay attention to the final sixty seconds where we get the closing print.
When you trade using daily closing prices, the goal is to ignore the intraday price movement.
What are the benefits of trading using daily closing prices
We wrote an article devoted to this question, Why End of Day Trading is Superior, which goes in depth to the pros and cons of swing trading using daily closing prices. I highly recommend giving that a read. Here are the high-level benefits we explore:
- Make fewer, but more quality decisions.
- Buffer against the intraday whipsaw and volatility.
- Save time and allow a life outside of trading.
- Natural enforcer of discipline.
We also dig into the drawbacks of implementing this type of strategy such as:
- Missing out on moves because a stock runs away without you.
- Paying up for stocks you could have gotten cheaper intraday.
- Exposing yourself to more risk if you’re also using stop losses on closing prices.
Entry signal considerations
There are a few different points to execute on your entries and exits and we’re going to cover the pros and cons of the more common techniques below.
We’re not going down the rabbit hole of strategy development, we’re simply looking at the execution considerations once your strategy or system produces a signal. For strategy development, consider reading How to Develop Simple Swing Trading Strategies next.
Place orders at the end of the day before or at the market close
This is the way I did things for many years, and it’s probably the most unconventional of all approaches. I use to place all of my orders in the last 30 minutes of the trading day once I’ve got a good idea where markets are going to be closing on the session.
Instead of waiting for the exact close, or even until the next day like many other alternatives, I choose to participate at the “earliest” possible point, right before the daily candle closes.
Hypothetical breakout example using an end of day entry:
Place orders at the market open the next day
This is the most common approach.
- Wait for markets to close.
- Run your scans, aka “do your homework” and find out what triggered a new entry/exit for you.
- Place orders to buy on the next day’s market open.
Here’s that same breakout example using market buys at the opening the next day:
Place stop orders above the signal bar closing price
A slight spin on the last approach, but instead of executing blindly at the next market open, you simply wait for the stock to exceed the prior day’s close (or high) before entering the trade. This gives you a nice blend of “confirmation” without waiting for a second daily close. We wrote this guide: Buy Stop Limit Orders for Swing Traders if you need help figuring out the execution of this method.
That breakout would have never triggered using this entry method:
Here’s how these approaches stack up against one another:
Before close at end of day
|Earliest entry out of all the options. Gets you in the strongest stocks fast and before potential follow through the next day.||Risk of getting into stocks without confirmation and it also requires you to run scans or watch markets closely for at least the final 30 minutes of the day for quick order entries before the market close.|
On next morning open
|Easiest to run scans and do homework entirely after market hours. Virtually no intraday screen watching required.||Buying the next open blindly leaves you at risk of paying up for a stock that gaps up the next morning open beyond your intended (ideal) entry price.|
Next open on follow through or specific trigger
|Gives a great blend of confirmation, avoids fakeout moves and also flexible in that no intraday screen watching required.||Cons are similar to on the next open approach. You can get caught purchasing at a higher price relative to your desired levels or outright miss the trade altogether if it opens, holds, and moves beyond your trigger action area.|
Intraday versus end of day stop losses
Everything above has been about the entry, but an equally important consideration is how you handle exits when the trade goes against you.
The primary question once again is, do you also want your stops to be at the close, or do you want to take exits intraday?
Just like with entries, there’s no right or wrong answer. Here are some thoughts based on my experience.
The shorter your hold time, the more likely you will want to honor stops intraday.
The reason is simple.
If you’re looking to capture short multi-day swing (2 to 4 days), chances are your position sizes will be on the large side, and your targets will probably be 10% or under in terms of distance.
Waiting for the market to close when a position is falling against you, could cause some real damage, especially as you’re only playing for a quick multi-day move.
On the other hand, if you’re trying to score 25%+ swings, chances are 1 day of selling isn’t going to matter as much because your position sizes will be smaller.
The benefit of waiting until the end of the day before stopping yourself out is to avoid the intraday whipsaw and volatility.
Here’s a hypothetical example:
Other special case considerations would be:
- Earnings day with a poor reaction
- Analyst downgrades
- Management departure
- <insert abrupt catalyst>
These aren’t everyday happenings (I sure hope not anyway), but it’s something you’ll want to be prepared for.
Will you implement special rules, or will you carry on business as usual?
Profit taking intraday versus end of day
Profit taking is something else you need to think about.
For me, unlike stops, I am a fan of taking profits intraday.
Here’s a past trade that members and I took in symbol $AXON.
Notice the second-day we were in the trade we saw a large intraday range expansion over $25. It rallied nearly 10% throughout the day but only managed to finish the session up +1.51%.
We scaled profits twice intraday, once at 25.32, another at 26.20.
If we hadn’t done that, we would have exited the trade several days later for a net loss as it began breaking down below support.
On the flip side, taking profits intraday can have its drawbacks. Generally speaking, when stocks start the day strong, they tend to remain strong into the close.
Early profit-taking can be great for situations like the AXON example above, but if you get in the habit of taking profits too aggressively early on in the day, you may prematurely trim yourself out of large winning trades.
Finding a balance and creating some rules that can help you during choppy times, but not trim you out too fast during trending environments, is the ideal strategy.
How to trade stocks using daily closing prices – conclusion
Hopefully, you’ve got a pretty good idea of some of the high-level considerations of running an end of day trading strategy.
We didn’t get into the specifics of defining what a trade signal actually looks like, but you should have an underlying framework to build on top of.
3 related articles that I highly recommend:
- How to Get Started Swing Trading Stocks
- How to Develop Simple Swing Trading Strategies
- Why End of Day Trading Is Superior
Questions or comments? Leave them below! Thank you for reading and good luck out there.
Enjoy what you read? Share it below and be sure to tag @thetraderisk.
Posted in Article, Trading Strategy
Tagged with Breakouts, End of Day Trading, Entries and Exits, Profit Targets, Stop Losses, Swing Trading, Video Lesson
Do you use trailing stops when you decide to sell? when I see a stock going up 5 or 6% in a day, I’ll usually enter a trailing stop order with approx 10% of the stock gain as the trailing loss. Hopefully it will march up if the stock goes higher. Downside is of course it reverses quickly after you enter it and you are down 10% of what you could have had. I’m then freed up to leave it alone. I may still chose to sell the stock before the end of day if it never stops out.
Over the years we’ve gotten less aggressive using trailing stops because exactly as you point out, they can easily whipsaw you out of otherwise winning positions. So while they are psychologically rewarding, the latest research we’ve done suggests either not using them or keeping the trail wide. Of course it also depends on other factors like the structure, time horizon, and type of trading you’re doing.
My interest is “Buying At The Close” and “Selling On The Next Day Open”.
My experience is that many stocks make major price jumps on the open and then trail off slightly over the next 15-20 min. However, most of the times when this happens, it is suboptimal to even consider entering the market because the major price jump has already occurred at the open. Thus, your downside risk for the day is often higher than your upside potential or relatively flat after the opening jump has occurred for the day.
I am looking for a more reliable method of determining when to buy stock at the close of the preceding day.
I have tried looking for trends regarding what direction and magnitude that a stock will move, following the prior day’s movement and percentage.
I am also looking into possible other indicators such as the inflow or outflow volumes at the end of the day.
Do you have any experience/recommendations regarding that?
Here are some comments below:
I think this may be true, but I haven’t actually run the tests to verify. I’d just point out, there are of course those situations where a stock gaps up and runs higher the entire day. For instance, look at ticker MJ yesterday (11/5/20) and today (11/6/20). Gap and gos where the opening price was just the start of the rally.
This is a big question and one that weaves right into all of the other considerations of strategy development. I’m personally a fan of analyzing price itself via OHLC and bar over bar analysis, but there’s really no single factor I would recommend looking most closely at. Continue to iterate and test is my only suggestion.