Ever wonder how does the system decide the opening price of the day? Why it will gap up or gap down?
Exchange uses theoretical opening price & volume to decide the opening price with 4 rules.
R1: Maximum Executable Volume
R2: Establishing the MINIMUM SURPLUS (Lowest quantity shares left in the market)
R3: Ascertaining where the market pressure exists (+ve/ Surplus will remain on the buy side, -ve/ negative will remain on the sell side.)
R4: Consulting reference price (Previous day closing price).
Need to based on the above 4 principles sequence to determine TOP. For example: if R1 doesn’t fulfil, then fall to R2 and follow by R3 and R4.
By understanding the Theoretical opening, it helps us to decide our morning day trade. (link below for our Pre-open market trade.)
You may watch the video explanation at the link below :
What is R1: Maximum Executed Volume?
- Assuming everyone is selling the same type of surgical mask in the market.
- There are 3 sellers, you, Kelvin, Bob & 1 buyer, Lucy.
- 10,000 is the maximum the market is able to absorb and at 1 price only. So the TOP will fall under RM1.
- If there are 3 price differences to fulfil the maximum volume, RM 1, RM 0.90 & RM 0.80, then we will be based on R2 to find out which price TO will be. :
2nd Principle, R2: Establishing the MINIMUM SURPLUS (Lowest quantity shares left in the market):
In the above case, the lowest quantity of shares left in the market is +2,000, RM 0.80. Therefore Theoretical Opening price will be RM 0.80.
However, if there are 2 prices, they have the same lowest quantity of shares which in this case is 0.90, -2,000 & 0.80, +2,000. Then the system will move forward to principle 3 to find out which price will be TO price.
3rd Principle, R3: Ascertaining where the market pressure exists (+ve/ Surplus will remain on the buy side, -ve/ negative will remain on the sell side.)
If under R2, there are 2 or more price levels that have the same surplus quantity. Then the system will proceed to 3rd principle, R3 to check where the market pressure from.
If the surplus more on is positive, then the pressure is from the buyer side, so the TOP will follow the highest price in the Buy Queue and vice versa.
For the above case, the pressure is from the Buyer side, because the surplus is positive due to Cumulative Buy Quantity minus Cumulative Sell Quantity. Therefore we will take the highest price of Buy Queue as TOP, RM 1 vice versa.
4th Principle, R4: Consulting reference price (Previous day closing price).
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Malaysia stock market is a unique market, hence it requires a customized trading approach to tackle & swerve. Many existing traders in Malaysia applies a plug-and-play strategy from the overseas stock market, but it is not necessarily the best strategy to trade in KLSE. This is due to the difference in local and overseas stock market regulation and the size of market participants of institutional funds & retail investors.
“True traders react to the market.” is the backbone of our trading method. Our findings and strategies are developed through years of trading experience and observance of the operating style in Malaysia stock market.
Trading Account Opening
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