Different Chart Types Explained
Charts have played a vital role, from your early maths classes to market analysis. In the early days of trading, modern market tools didn’t exist. Instead, traders-maintained numbers, fluctuations, lows, and highs on hand-drawn chart papers.
But today, modern charting has moved from hand-drawn charts to software-based charts with hundreds of tools and indicators. Different chart types give out different information to traders, helping them make the right decisions in the stock market.
Technical analysis is all about timing. It focuses on getting the right price of the stock. For example, you may find a stock that is performing well on the stock market. However, if you buy it at the wrong price, you will have to suffer heavy losses. Technical analysis also involves the identification of market trends using stock prices. A stock chart is where all this action happens.
The first tool in technical analysis is market trend analysis. A trader cannot complete a trend analysis till historical stock charts are available. Charts are needed for discovering trends. Therefore, one must understand a stock chart, the chart types, and how to read stock charts to excel at technical analysis.
What is a Stock Chart?
Stock charts are the graphical representation of the movement of a stock’s price or trading volume. There are different ways to present this information, resulting in the construction of different chart types. As a technical analyst, you need to identify the chart type that will provide information about a hidden trend most effectively.
Technical analysis relies on three major principles.
- The stock price is an indicator of all the relevant information available in the market.
- The movement of stock prices is as per market trends.
- History tends to repeat itself.
If the prices of stocks follow patterns, traders can benefit significantly from the study of patterns. As a result, they can make better trading decisions. Since stock charts display the historical price movement of a stock, they are very useful for trading.
Types of Charts
- Line charts
One of the most common chart types is the line chart. It tracks the stock’s closing prices for a given period. A dot represents the closing price point. And on connecting all the dots using lines, the chart is graphically represented.
Compared to other chart types, a line chart is quite simplistic. It helps traders spot trends in the price movement. But, since the chart’s focus is on closing prices, a trader cannot derive much information about intraday price movements.
- Bar charts
In a bar chart, the dot is replaced by a vertical line to represent each plot point. Two horizontal lines extend from both sides of the vertical line. The lower end of the vertical line plots the lowest price at which the stock was traded during the day, while the top of the vertical line represents the highest traded price. The opening price of the stock is represented by the left extension. The closing price of the stock is represented by the right extension.
A bar chart offers more information than a line chart. It provides insights into volatility. A longer line means greater volatility in stock trading.
- Candlestick charts
A popular chart type for technical analysis is the candlestick chart. It provides a lot of information precisely. The chart uses the shape of a candlestick to represent price movements for a day. Similar to a bar chart, it plots four data points - open, close, high and low.
Unlike bar charts that provide information on volatility for a single trading day, candlestick charts provide information for a longer period. Moreover, the chart represents candlesticks in different colours depending on the movements in price. For example, a green or white candlestick indicates rising prices, while a black or red candlestick indicates falling prices.
- Point and figure charts
Stock analysts used the point and figure charts even before computers were introduced. However, in recent times, its use has reduced tremendously because of its complexity. The chart displays volatility in the price of a stock over a particular period. The vertical axis marks the number of times stock prices fell or rose to a particular level, while the horizontal axis represents time intervals.
Performing technical analysis without a stock chart is like building a house without land. You cannot use a conventional chart type for the analysis since you need to plot 4 data points at the same time. A line chart helps to interpret trends. A bar chart does not have any visual appeal. Moreover, it makes the identification of patterns tough.
Candlestick charts are of two types - bullish candle and bearish candle. While the structure of the candlestick remains the same, its colour indicates the market trend. With an increase in frequency, the number of candles increases. Trading success largely depends on time frames. Make sure you choose this wisely.
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Frequently Asked Questions
Technical analysis of stocks involves the interpretation of stock price movements and trade volumes. A lot of data on these parameters is widely available in the market. But, for easy identification and understanding, the information needs to be represented in a different format. The process of technical analysis starts with the construction of stock price charts.
A stock chart is a graph representing the price of a stock over a given period, say five years. Advanced stock charts highlight additional data. On reading a stock chart, traders can derive a lot of information about a stock’s historical, current, and expected performance.
Stock chart patterns use lines and shapes to draw different chart types. With the help of these charts, traders can predict forthcoming price actions like breakouts and reversals. Stock charts are primary tools for technical analysis and allow traders to use past price actions as a benchmark for potential future market movements.
There are four chart types principally used in technical analysis. These are line charts, bar charts, candlestick charts, and point and figure charts.