The term previous close refers to the price at which a financial instrument ended its trading session on the previous trading day. It represents the last traded price before the market closed.
Price Patterns: Traders analyze price patterns and trends to make informed trading decisions. The previous close is an essential data point for identifying patterns like gaps (when the current opening price is significantly different from the previous close) or continuation patterns (when the price continues its trend from the previous close). These patterns provide valuable insights into potential price movements.
Support and Resistance Levels: Support and resistance levels are significant price levels at which a stock tends to encounter buying or selling pressure. The previous close can act as a support or resistance level, as traders often observe how the price behaves around this point. If a stock consistently fails to move above the previous close, it may indicate strong resistance. Conversely, if it consistently finds support near the previous close, it could suggest a level of buying interest.
Volatility Assessment: Volatility measures the degree of price fluctuation in a financial instrument. By comparing the current price to the previous close, traders can assess the volatility of an asset. If the current price is significantly different from the previous close, it may suggest higher volatility, which can present both opportunities and risks for traders.