Types of Charts
In our last article, we learnt about construction and importance of charts in technical analysis. In this article, we will be covering various types of charts, frequently used in technical analysis. Before we go in details of these charts, let’s first quickly understand few terms associated with price of a security (shares/bonds/derivatives)
- Open price: price at which first trade happens, after market opens for the day
- Close price: price at which last trade of the day happens. Sometimes, it’s the average price of last few minutes
- High price: highest price attained by the security, during the daily trading session
- Low price: lowest trading price during the daily trading session
- Line chart
It is constructed by joining various data points at different time intervals through a straight line. As discussed in the last article, no of data points varies according to unit chosen for horizontal axis. Below is the line chart that we discussed in our last article. It is constructed using last 3 months daily close price and has day as the smallest unit on horizontal axis.
- Bar chart
It shows a lot more information, compared to a line chart. In line chart, we joined all the data points using a straight line. Here, we don’t join these data points. As shown in the chart below, at each unit of time (horizontal axis), a vertical line is constructed. So for the same Maruti chart that we plotted above, a bar chart will have 90 vertical lines for 3 months – one line for each day. Top most point of the line shows high price of that day. Bottom most point depicts the low price of daily trading session. Also, you can see a small horizontal dash cutting each of the vertical lines. It represents daily close price. If we join all the points at which these small dashes are cutting vertical lines, we will again get the line chart that we discussed in our previous point. Apart from high, low and close price information, there is one more very important thing that bar charts convey. The length of each vertical line shows the extant of daily price movement. If the length is very high for a particular day, it means that there is big difference between highest and lowest prices attained during that day’s trading session. Thus, a stock would have experienced high volatility in that trading session.
- Candlestick chart:
As discussed in the previous point, bar chart shows information about high, low and close prices. In addition to this, a candlestick chart also shows information about the open price. Again, a vertical line is placed for each of the data point. So if we are using day as the smallest unit on horizontal axis, we will be adding one vertical line for each day. Similar to bar chart, top point of the vertical line will depict high price and bottom point will depict low price. But instead of dash, now we add a bar on top of the vertical line, as shown in the chart below. These vertical bars can be hollow/white or filled/black. A hollow bar tells us that close price is higher than the open price. In this case, upper end of bar chart will show close price and lower end will show open price. Length of the bar will depict difference between open and close price, while length of the line will depict difference between high and low price. On the other hand, a filled bar represents a scenario where close price is less than the open price. Here, lower end of the bar will show close price and upper end will show open price. Thus, upper and lower end of bars always represents close and open price, but which will depict what depends on whether it is filled or hollow.
There is a lot more information conveyed by a candle chart, apart from the four price points that we discussed. Let’s take an example. Suppose everyday there is a fight between a bull and a bear. All the information about this daily fight is conveyed using a candlestick chart. In this case, following would be the interpretation of different characteristics of a candle chart
- If bull wins the daily fight, it is represented by a hollow bar
- If bear wins the daily fight, it is represented by a filled bar
- The intensity of the fight is represented by the length of the line
- Length of the bar represents margin by which either one wins
Now suppose bull means buyers in the market and bear means sellers. Every trading session is a fight between buyers and sellers. If buyers win, stock price increase and close price is above the open price. Thus, we get a hollow candle. It shows that buying pressure on the stock was much more than the selling pressure, and length of the bar represents extent of difference. If sellers win, it means selling pressure was more during the trading session and closing price would be less than the open price. This would be represented by a filled bar. If we are continuously getting hollow candles, in our example this would mean bear has become weak, as it is losing every day. Similarly, in real life it would mean that buyers are outnumbering sellers and there is strong bullish momentum in the stock. Opposite will happen in the case of filled candles.