What is the 'Opening Price'
The opening price is the price at which a security first trades upon the opening of an exchange on a given trading day; for example, the New York Stock Exchange opens at precisely 9:30 a.m. Eastern. The price of the first trade for any listed stock is its daily opening price. A security's opening price is an important marker for that day's trading activity, especially for those interested in measuring short-term results such as day traders.
BREAKING DOWN 'Opening Price'The NASDAQ uses an approach called the "opening cross" to decide on a price level that serves as the best opening price, given the orders that accumulated overnight. Quite commonly, a security's opening price is not identical to its prior day closing price. This is due to after-hours trading and changes in investor valuations or expectations of the security occurring outside of trading hours.
Opening Price Deviation
Investor expectation can be changed by corporate announcements or other events that make the news. Corporations typically make news-worthy announcements that may have an effect on the stock price after the market closes. Large-scale natural disasters or man-made disasters such as wars or terrorist attacks that take place in the afterhours may have similar effects on stock prices. When this happens, some investors may attempt to either buy or sell securities during the afterhours.
Not all orders are executed during after-hours trading. The lack of liquidity and the resulting wide spreads make market orders unattractive to traders in after-hours trading. This results in a large amount of limit or stop orders being placed at a price that is different from the prior day’s closing price. Consequently, when the market opens the next day, a substantial disparity in supply and demand causes the open to veer away from the prior day’s close in the direction that corresponds to the effect of the announcement, news or event.
Opening Price Trading Strategies
There are several day-trading strategies based on the opening of a market. When the opening price varies so much from the prior day’s close that a price gap is created, day traders use a strategy known as “Gap Fade and Fill.” Traders attempt to profit from the price correction that usually takes place subsequent to a sizable price gap at the opening. Another popular strategy is to fade a stock at the open that is showing strong pre-market indication contrary to the rest of the market, or to similar stocks in a common sector or index. When a strong disparity is present in pre-market indication, a trader waits for the particular stock to make a move at the open contrary to the rest of the market, and then takes a position in the stock in the general direction of the market when momentum and volume for the stock begins to diminish for the initial contrary price movement. When executed correctly, these are high probability strategies designed to achieve small quick profits.