Types of Charts

We said in the first section that Charts are the working tools of the technical analyst and they have been developed in various forms and styles to represent graphically almost anything and everything that takes place in the stock market.

There are three main types of charts that are used to analyse price movements. They are – the line chart, the bar chart and the candlestick chart.

LINE CHART

Line chart is the simplest of the three charts. A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, it reveals the general price movement of a share over a period of time.

BAR CHARTS

The most basic tool of technical analysis is the bar chart. This chart displays basic market price data over a defined period of time. Daily bar charts note the open, high, low and closing price of an asset. Rising vertically, the bar marks the high and the low of a given time period, with the starting price marked by a horizontal line, or tick, to the left and the ending or closing price marked by a tick to the right.

Structure of a bar chart

CANDLESTICK CHART

Another type of chart used in technical analysis is the candlestick chart, so called because the main component of the chart representing prices looks like a candlestick, with a thick ‘body’ and usually a line extending above and below it, called the upper shadow and lower shadow, respectively. The top of the upper shadow represents the high price, while the bottom of the lower shadow represents the low price. Patterns are formed both by the  body and the shadows. Candlestick patterns are most useful over short periods of time, and mostly have significance at the top of an uptrend or the bottom of a downtrend, when the patterns most often signify a reversal of the trend.

While the candlestick chart shows basically the same information as the bar chart, certain patterns are more apparent in the candlestick chart. The candlestick chart emphasizes opening and closing prices. The top and bottom of the real body represents the opening and closing prices. Whether the top represents the opening or closing price depends on the color of the real body—if it is white/ blue/green, then the top represents the close; black / red or some other dark color, indicates that the top was the opening price. The length of the real body shows the difference between the opening and closing prices. Obviously, white/green/blue real bodies indicate bullishness, while black/red real bodies indicate bearishness, and their pattern is easily observable in a candlestick chart.

Structure of a candlestick chart

CONCLUSION

What we know so far is about the types of charts. While line charts are the simplest form of charts, candlesticks are more advanced and they reveal stories not detected with other charts. Whether you use a line chart or candlestick chart, you need to draw trend lines to find out direction of the stock prices. More about that in the next section- trend lines.

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1 Response to “Types of Charts”

Roshni

January 8, 2014 at 9:18 pm

Hi VIctor,

Very informative article. Thank you.

What does the thickness of the candle stick mean? The thickness varies from line-thin to candle-thick.

Regards
Roshni

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