Why closing prices are significant in the stock market?

Institutions compute various data based on the closing prices and decide their functionality accordingly.

A candlestick consists of four key levels namely, the high, low, open, and close. Together, they form a candlestick, which generally represents the overall sentiment of the market during that period. This is important in the interpretation of the market trend.  

At the start of the trading session, the market is subjected to gap-ups and gap-downs, owing to the global cues. Thus, the ‘open’ is largely based on the news flow before the market opens. However, during the day, a lot of long and short positions are created based on the sentiment among the market participants. With such sentiment being factored in, a candle is formed. Towards the end, the institutional activity is intensified, and sentiment clarity is seen, which helps the traders to understand their trades.

Interestingly, the closing price is not the same as the last traded price of the stock. The closing price is the weighted average price of the last thirty minutes of the trade.  

Want to know how is the closing price calculated with the help of the weighted average price? Let me explain it to you with the help of an example: 

Let’s say that two shares of stock A are trading at Rs 1,000 at 3 pm. At 3.15 pm, another two shares are trading at Rs 1,002 while three shares are traded at 3.30 pm at the price of Rs 1,003. Thus, their weighted average price will be calculated as (2*1000+2*1002+3*1003)/7 with seven being the total number of shares traded in the last thirty minutes. Thus, the closing price is calculated to be Rs 1,001.85.  

The above pointers factor in all the movements that happen during the ending stage of the trading session.

In general, the closing price confirms the sentiment. More often, traders are exposed to the risk of false breakouts & breakdowns, and intraday volatility. To avoid such a scenario, the focus is put on the closing price, which lets the traders understand the overall trend in the market.   

As per a famous stock market saying, "Amateurs open the market and the professionals close it", the closing price is given a high significance. Institutions compute various data based on the closing prices and decide their functionality accordingly. Moreover, it helps the traders in analysing the sentiment in the underlying asset.