Theory on Intraday Candlesticks

Theory on Intraday Candlesticks

The conventional wisdom with daily candlesticks is:The Close is an important daily price b/c it show the digestion of all info. by traders and investors for the day: the final vote on where the security should be priced at. And the Open is the first digestion of all overnight news and is where market makers feel they can set price that will make them money but not kill the market much.Well, IMHO, these truisms cannot hold for intraday candlestick charts. The price at every 3min, 5min, 15min, etc interval is no more relevant than the price at anyother time interval. There is nothing "magical," special about prices @ 11:14:59 & 11:15:00 than prices @ 11:14:57 & 11:14:58. But the first group become the Close & Open on a 15min chart while the other group just become a few ticks (in most cases).So why do candlesticks seem to work on an intraday basis, when the Open & Close are seeminly randomly selected?Well, I have two explanations:First, the time interval of the chart will show a trend over that period. A Green/White/Empty 15min bar will show that price rose during the past 15mins. That's important to know.Second, and most interesting to me, is why the Open & Close values are still important--even intraday, eventhough they are essentially a random sample taken every certain time interval. This is because the High and the Low are NOT random samples, they represent very decidedly UNRANDOM data points.For example, lets say a bar is composed of 500 ticks. And only 50 of those ticks are at the High and 50 are at the Low. That means only 10% of the ticks were at the High and 10% were at the Low. 80% of the ticks did not occur at the High or Low. Clearly the High and Low do not best represent the price of the bar.However, a random sample of the ticks might very well represent the best price, because you are likely to pick the most frequent price. Well that's exactly what the Open and Close are. A randomly selected tick. NOT the Higest tick, nor the Lowest. Just a random tick. But ODDS are that that tick, because it's randomly selected, will more acurately reflect price than will the High or Low.So if that tick is near the High, that creates a certain pattern that might be tradeable. If the tick is near the Low, again maybe there is a tradeable pattern.But it's not because of the "magical" significance of the Open and Close that can be attibuted to daily charts; it's because the Open and Close on an intraday chart will more likely reflect the average/fair/actual/etc. price of a security than the High or Low which sepecifically select outliers.So it seem an intraday candlestick chart is actually comparing "randomly" selected ticks to non-randomly selected outliers. How near or farway those randomly selected ticks are to the outliers is imporant and potentially represents tradeable information.