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Basics of Technical analysis

Types of Charts

Earlier, we were introduced to the basic concept of technical analysis. Chart reading is a primary step for studying technical analysis. In this unit, we will discuss the different types of charts. 

 

Charts are a two-dimensional representation of price over time. There are different types of charts available. But most popular and widely used among them are Line Charts, Bar Charts, and the Candlestick Charts. The X-axis, i.e. the time axis is crucial. The unit can be month, week, day, hour, 5 min, or a few seconds. The shorter the time period, the more detailed the chart becomes. The beauty of time in technical analysis is that the same concepts apply to charts irrespective of the time-frame of observation. However, the success rate of individual patterns or indicators-based decisions may vary across time frames. Generally higher the time frame of the chart, relatively higher is the probability of any concept in the market.


Line Charts

In line chart, each and every price point is represented as a dot. The X-axis represents the time scale and the Y-axis represents the price. Each dot or point represents the closing price at the end of a unit of time. These points are then joined to form a line. This is the simplest form of a chart. But this is quite good if we want to plot 3-4 similarly priced stocks in a single chart and compare. Moreover, the line chart gives the clearest idea about the price direction of a stock.

Here is an example of Line chart:

Bar Charts

A bar chart is comprised of a series of bars. Every bar has four important price points - open, close, high and low. The bars are represented in green or blue color when close is higher than open and red color when the close is lower than open. The bar charts are more detailed than the line chart and are good for demonstrating or spotting the classical price patterns. We will discuss the classical chart patterns in appropriate time.

Here is an example of Bar chart: 


Candlestick Chart

The concept of candlestick charts came from Japan. That is why they are often referred to as Japanese candlestick charts. These charts are the most versatile and popular form of chart representation. Price behavior during each time unit is represented in the form of a candle. If the closing price of a stock is higher than the open price during a particular time period, then the candle is green or blue, if the close price is below the open price then the candle is red. Each candle has a body and two wicks. The distance between open to close is represented by the body of a candle and the upper and lower wicks represent the highs and lows of a candle. 

 

Note: A Bullish candle can be represented in green, blue or un-filled (white) colour. A Bearish candle can be represented in red or filled (black) colour. It must be assumed here we are using blue as bullish candle and red as bearish candle for our study in all the candlesticks charts. 

 

 

Candlestick chart is special not only because it adds a special visual clarity about the price action, but also because often a single candlestick or two or three consecutive candlesticks together form a pattern that indicates the reversal of a prior move or give conviction on the continuation of the ongoing move. These are called candlestick patterns. We will discuss them in due course of time. 

Here is an example of Candlesticks chart: 

 

 

Note: There is another type of chart named Point & Figure. Due to the complexities of understanding the concept, we have prepared a separate module. Click the link to visit the module.

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