Types of Charts in Technical Analysis

Before you continue to read this blog, feel free to check out the previous works in this series :
Introduction to Technical Analysis and Introduction to Stock Charts.

Types of Stock Charts

How the information is displayed is a function of the type of chart. Charts plot historical data based on a combination of price, volume and or time intervals. These are the three most commonly used charts for day trading. 

Line Charts

Line charts are composed of a single line from left to right that connects the closing prices (or any specified price data point) at each specified time interval. The chart looks like a basic graph. It gives a bird’s eye view of the historical price action in a single line. This is a popular type of chart used in presentations and reports to give a very general view of the historical and current trajectory. A common method is to draw trend lines   to connect the peaks and valleys to anticipate potential price inflection and break points. For the most part, this chart may be a bit too simple for active day traders.

A candlestick chart 

Candlestick Charts

Candlestick charts were developed by Japanese rice merchants to track the price action of rice futures in the 1700s. Japanese candlesticks were first introduced to the United States through a book titled “Japanese Candlestick Charting Techniques” by Steve Nissan in 1991. The candlestick chart has become standard on almost all platforms and is the most popular style of chart used by traders. The chart utilizes the opening, high, low and closing price data per specified time interval to generate a candlestick, which is plotted on a price chart.

The candlestick is composed of three parts: the body, the upper tail and lower tail. Tails are also known as wicks. The body is composed of the opening price and closing price for the time interval also known as the period. The body is colored either green or red. A green candle indicates the closing price was higher than the opening price, which is considered bullish since the net result is price rise.

A red candle indicates that the closing price is lower than the opening price, resulting in a net price drop, which is bearish. The upper and lower tails are two thin lines extending from the top and bottom of the body towards the highest price and lowest price for the period. Traders often search for specific candlestick pattern formations to generate trade signals

Bar Charts

Bar charts are also known as open-high-low-close (OHLC) charts. They are the Western version of Japanese candlesticks. Bar charts simply use vertical lines that extend to the highest and lowest prices for the specified period and a short horizontal line extending left at the opening price and short horizontal line extending right to indicate the closing price. The color of the bar, similar to the candlestick, is based on the net gain (green) or loss (red) on the closing price. The coloring is optional.

The absence of a color filled in body between the open and close is the main distinction that between a bar chart and a line chart. Many traders feel line charts are easier to follow due to their simplicity. Bar charts tend to visualize the price range easier than candlestick charts, which tend to illustrate emotions. For example, a large red body can indicate pure fear (resulting in panic selling), which can be a distraction to some traders who prefer to maintain a neutral interpretation based on the price range expansion and contraction. 

Thankyou for reading and keep your eyes open on the next part on How to read a stock chart !

By - Pranit Bhandari

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