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Different chart types can help you analyze price action, the three most commonly used being
- Bar Chart
- Line Chart
- Candlestick Chart
Bar Chart
This chart type is made up of vertical bars each showing the open, close, high and low of prices. Each vertical bar represents the range of each time period. The top of the vertical bar indicates the highest price while the bottom of the bar represents the lowest price at that particular time. The opening price is shown by the tic to the left of the bar and the closing price is the tic on the right.
Line Chart
The line chart connects all the closing prices with a line, which shows the general price movement.
Candlestick Chart
The candlestick chart is very popular amongst traders because it shows a lot of information regarding price. From this type of chart we can obtain the open, close, high and low of prices, just like in a bar chart.
The difference between a candlestick chart and a bar chart is that visually, candlestick charts are easier to use when trading and performing technical analysis.
The reason is because candlesticks are good at identifying market turning points. We are able to identify swing highs and swing lows. For example, they show reversals from an uptrend to a downtrend or a downtrend to an uptrend. Also, the candlesticks sometimes form a certain formation like a shooting start and a doji, which also help us identify a possible trend reversal. We will learn more about this later.
The Body of a Candle
The candles on the chart have what is called a body. This body shows us the open and close prices. If the body has a wick, (sometimes called a shadow), then these wicks record the highs and lows of the price at a particular time. Each candlestick represents the range of the time period.
When candlestick charts were first developed by the Japanese in the 1600’s, they used black and white candles.
A white candle means that the closing price was higher than the opening price during that time period represented by the candle.
A black candle shows the opposite, meaning the closing price was lower than the opening price.
The shadow on the top of the body of the candle represents the highest price traded during the time period and the shadow below the candle represents the lowest price.
Of course, today with the use of technology and online trading platforms, it is possible to use different colors for the candles.
