Motilal Oswal Securities
In the last classroom session, we discussed the basics of technicals, trends and charts. Now let us understand more about charts and about how to read them to identify trends in a particular market or index.
What is a chart?
A chart is a tool in the hands of a technical analyst to identify the probability of price movement. It is a graphical representation of a series of prices over a set time frame. Technical analysis is done by plotting graphs of the price movement of a stock or index. This can be done using line, bar and candlestick charts.
The trends from these charts could be identified by way of patterns, moving averages, trend lines, or through oscillators. The time horizon for such analysis could be daily, weekly or monthly, depending upon the need of trader or investor.
Types of charts:
It is one of the basic types of charts, representing only the closing prices over a set period and formed by connecting the closing prices for each period over the time frame.
Many investors consider the closing price to be more important than the opening price, high or low within a given period. We also use line chart to look at long period data, where intraday price fluctuation is not required.
The image below is a line chart of price movement over 6 trading sessions, where the major trend is positive. Fluctuation is seen in between the broader bullish trend.
It expands upon the line chart as the bar chart is formed by adding the open, high, low and close or the price range, based on the duration of the bar. It is made up of a series of vertical lines that represent the price range for a given period, with a horizontal dash on each side that represents the open and closing prices.
The opening price is the horizontal dash on the left side of the horizontal line and the closing price is located on the right side of the line. If the opening price is lower than the closing price, the line is often shaded black or blue/green to represent a rising period. The opposite is true for a falling period, which is represented by a red shade.
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period’s trading range. The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close.
Like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or blue/green. If the stock has traded down for the period, then the candlestick will usually be red or black.
Difference between line, bar and candlestick charts
Line chart shows only closing price on the chart, whereas bar and candlestick charts show the intraday movement of the stock (open, high, low and close).
Bar and candlestick charts both show open, high, low and close, but the difference between the two is the real body, which represents the difference between open and close. Candlestick charts capture the upper shadow and lower shadow, whereas bar charts consist only of a vertical line.