The opening price has long been considered something of a trendsetter in securities trading. If the open, the very first transaction between a buyer and seller for that trading day, was up against the previous day’s close, it was seen as a smiling sign for the rest of the day’s trading. It was believed to signal that some trader out there saw potential for the security to go higher, and that action was considered likely to influence others, as well. But if the open was down, traders stepped carefully.
There’s a certain amount of cynicism to this. U.S. stock markets ceased reporting the true opening price a long time ago, and instead the price released as “the open” is actually an average of the first five transactions. The various data sources generally can’t agree on that, which is why it’s not difficult to find publishers listing conflicting opening prices.
Within the forex trading market, the open lacks the potency it has in the share market or in commodities trading. This is of course because of the 24/5 trading schedule in forex trading; for four days in the trading week, the open is no more than the start of another candle, or at most the time of day when rollovers are paid or charged. For that matter, the open has lost much of its glamour in global share markets due to after-hours trading.
Another reason the open has lost its importance in all categories of trading, including forex, is a practice among fund managers known as buy on open. If a deposit’s been made into a managed fund that has pre-set allocations, e.g., a certain percentage goes to this global index and another percentage to that carry trade currency pair, then the capital is distributed on opening, driving the currency pair’s price higher (or lower) regardless of any technical or fundamental drivers. It’s an automatic allocation, no more.
In forex trading, the open that catches everyone’s eye is Monday in New York, because if there’s been an important fundamental or political event, or even a natural disaster, the open can gap significantly from Friday’s close. There’s not a lot of gapping in the forex trading market, but this is one point in time where it can truly hurt a profitable position. Causes can range from expected events such as G20 meetings to unexpected ones such as earthquakes or currency devaluations, and this is the reason many forex traders refuse to hold an open position over the weekend.
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