When I took my first trade 12 years ago, all I knew were charts, and the candles or bars that filled them. I quickly learned, as you all have done, to see the "story" associated with a series of candles/bars. I followed a guy who uses "
price action trading" and who looks at bar-by-bar analysis, and it seemed to make sense to my 6-month-old trading brain.
However, as you begin to understand even the basics of market microstructure (bids, offers, etc.), you
should begin to see the market as buyers and sellers who are matched with each other to produce a series of transactions. For a very active market, with tens or hundreds of thousands of transactions per day, we would be overwhelmed if we viewed each of these transactions in isolation. So, for the sake of our ability to grasp the bigger picture, we aggregate these transactions.
The most straightforward way to aggregate transactions is by time. You group all transactions that occur within a particular time interval (say, 5 minutes), and you choose to display statistics about them. Among those statistics could be the average, max, min, first, last, median, variance, and the list goes on. Your standard candle/bar chart chooses to show 4 pieces of data: the price that traded first (the open), the price that traded last (the close), the max traded price (the high), and the min traded price (the low). This is your OHLC candle/bar. So, over a given time period, you know the very first price that traded, the very last one, the highest one, and the lowest one. If you think about it, that's not much data. Out of potentially thousands of transactions during that time window, you know 4 of them.
Now let's talk about the closing price. Let's use a 5 minute bar, since that seems to be the favorite of most. When you view the market as a series of transactions, the close of a 5 minute bar is simply the last transaction that took place before 9:35, 9:40, 9:45, ... 16:00. I ask the question: what is special about those times? Is 10:40 meaningful, in some way? 14:15? The strategy that says "the bar must close below price X" places importance on a particular time of day. What if you begin your 5-minute chart at 9:31 instead of 9:30? All of a sudden, 9:36, 9:41, 9:46, ... become important, and the closing price at 9:35, 9:40, and 9:45 are completely hidden from your view, lost in the aggregation of the bar.
A 5-minute "reversal bar" that closes at 10:45 may be a "
doji" on a 15 minute chart. When the period of aggregation is arbitrary (1 minute, 5 minutes, 15 minutes, 3 minutes...), the story that those aggregations tell is also arbitrary. What happens beginning at 10:45 is the same experience viewed from any angle, regardless of whether you have aggregated data from 10:30 to 10:45 over 3, 5, or 15 minutes.
It's arguably worse if you use a non-time-based bar to aggregate transactions. "The 233 tick candle must close lower to go short" is perhaps the height of what I can only term superstition. What is so special about the 233rd transaction that we must designate it as the close of a bar, and then place some meaning on it? "I'm going to wait for this 5 minute bar to close before I enter" may be even worse -- so, at 9:49 it's not a buy, but at 9:50, at the same price, it is? There's no logic there. Perhaps it all comes down to seeking confirmation--but confirmation comes from many factors, of which time is probably not the most important, particularly not an arbitrary
points during the day.
The exception I make are daily bars, particularly in equities, since
NYSE equity trading is closed from 20:00 to 4:00, and since the day is so well defined to be liquid from 9:30 to 16:00. Settlement of futures occurs at a particular time, accounts are marked to market, gains and losses are calculated, and margin calls are made. Trading is actually closed, for example, in the ES, from 17:00 to 18:00, and margin calls occur before this. However, since other markets may be open, even the daily close is not as important as the weekly close, which happens from US afternoon until Australia/Japan morning the following Monday--a true 48 hour break from any activity.
So, what's a better way to look at the market? Well, that's a whole other subject. But once you eliminate ideas that have no sound
basis in logic, you are left with fewer to choose from, which is a good thing! Disagree, agree? Talk about it!
