Types of Charts in Technical Analysis Tutorial
There are major four types of charts commonly used by investors and traders to track and study the markets. These chart types include line charts, bar charts, candlestick charts, and point and figure charts.
Now we will see each types of charts information and their uses for practical technical trading:
A line chart is a type of chart which displays data as a series of data points called ‘markers’ connected by straight line segments. Line charts are most often used to visualize data that changes over time. It is a basic type of chart common in many fields. It is similar to a scatter plot chart except that the measurement points are ordered and joined with line. Line chart in stock market most commonly formed by joining closing prices. This chart generally displays price trend but hides volatility. This type of chart is rarely used for technical trading. Some investors uses this type of chart with indicators and oscillators to catch top and bottom entry points.
A bar chart is a type of chart on which the top of the vertical line indicates the highest price, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar, and the opening price is shown on the left side of the bar. Like candlestick charts, these charts used in charting and study of chart patterns in technical analysis of security. They are also called as OHLC charts or Open-High-Low-Close charts. Before candlestick charts, most commonly used type of chart and popular among US traders in old times. I personally use them because I find more helpful than candlestick chart, because here I think you can see prices more clearly than candlestick chart. Like closing prices, opening price relation to previous close and these things matters in short term trading.
A candlestick chart (also called Japanese candlestick chart) is a style of financial chart used to describe price movements. It is like a combination of line-chart and a bar-chart: each bar represents all four important pieces of information for that time: the open, the close, the high and the low. They tend to represent trading patterns over short periods of time. Candlestick charts are most often used in technical analysis of equity and currency price patterns. Candlestick charting first appeared sometime after 1850. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata.
Candlesticks are usually composed of the body (red or green), and an upper and a lower shadow (wick): the area between the open and the close is called the real body, price excursions above and below the real body are called shadows.
The wick illustrates the highest and lowest traded prices of a security during the time interval represented. The body illustrates the opening and closing trades.
Now a days, commonly if the security closed higher than it opened, then body is shown in green color. If the security closed lower than it opened, the body is shown red.
A red candle represents a price action with a lower closing price than the prior candle’s close. A green candle represents a higher closing price than the prior candle’s close. Thus, the color of the candle represents the price movement relative to the prior period’s close and the “fill” of the candle represents the price direction of the period in isolation.
Point and figure chart: A point & figure chart is a chart that plots day-to-day price movements without taking into consideration the passage of time. Point and figure charts are composed of a number of columns that either consist of a series of stacked X’s or O’s. A column of X’s is used to illustrate a rising price, while O’s represent a falling price. Time is not a factor in P&F charting. These charts evolve as prices move. No movement in price means no change in the P&F chart. In classic 3-box reversal charts, column reversals are further filtered requiring a 3-box minimum to reverse the current column. The 3-box Reversal Method is the most popular P&F charting method. This type of chart is used to filter out non-significant price movements, and enables the trader to easily determine critical support and resistance levels.