Discussion Topic: Reading Technical Charts
Today we are going to explain three of the most popular chart types which are used in forex trading and stocks trading for doing technical analysis. Here, in this chapter, you will get an overview of how to read those technical charts and how to determine the trend of the market. Mainly we will discuss how to read line chart, bar chart, and Japanese candlestick charts.
Why a Chart is Important in Technical Analysis:
In order to summarize the trading actions that happen within a specific time period, the best way is to identify the Open (O), high (H), low (L), and close (C) price of that session. And to view the data of multiple sessions at a glance, we will need a charting technique that displays everything in a straightforward way.
Each of the trading days has a minimum of four data points to be considered, i.e. - the OHLC (open-high-low-close). So, if we look at a 15 days chart to identify the trend, we need to figure out 60 data points (15 day * 4 data points per day). So, imagine how hard it would be to visualize 6 months or a year’s data. That is why; the charting technique you use must be simple and crystal clear.
What are the Three Most Popular Technical Chart Types?
Below are the three most popular chart types that are used by the majority of the traders to identify the trend and doing the technical analysis:
- Line chart
- Bar Chart
- Japanese Candlestick Chart
Although the majority of the technical analysts use Japanese candlestick chart for their analysis, as a trader you will also need to use line chart and bar chart in some cases.
Now, let me start explaining all the chart types one by one.
How to Read Line Chart? Why You Need it?
The line chart is the most basic type of technical chart that shows only one data i.e.- closing price of an instrument for each interval (or time frame). A line chart put a dot at the closing price of each interval (time frame) and then draws a line connecting every dot it has plotted.
If we look at the 30 days data and 1 Hour time frame, then the line chart is formed by connecting the closing price of every 1-hour session for last 30 days.
The line charts can be drawn for various time frames such as 1 minute, 5 min, 15 min, 30 min, hourly, weekly, monthly etc.
The primary advantage of the line chart is its simplicity. Even if you do not have a vast knowledge of technical analysis, you can identify the general trend of that stock by looking into it only once. The disadvantage of the line chart is that it does not provide any additional details than closing price.
The effective use of line chart is only to find the general long-term trend and to draw trend lines.
How to Read Bar Charts?
A bar chart is little bit complex to understand but it is much more versatile than the line chart. It shows you the opening, closing, high, and low prices of a time frame.
The bar chart has 3 components:
- The Central Vertical Line: The top of this bar represents the highest price and the bottom of the bar indicates the lowest price of the stock / forex currency pair for a given timeframe.
- The Left Horizontal Dash: indicates the open price of the stock / currency pair.
- The Right Horizontal Dash: represents the closing price of the stock / currency pair.
The combination of the above three is termed as a bar. A bar can simply represent one segment of time, whether it is 5-minutes, 15-minutes, one hour, one day, one week etc.
Below is the picture of how the traditional bar chart looks like for the same chart shown above:
Bar charts are also known as “OHLC charts" because they simply indicate the Open, the High, the Low, and the Close for a particular stock / currency pair.
Here’s how to read the price bar:
- Open: The little horizontal line on the left is the opening price
- High: The top of the vertical line shows the highest price of the selected time period
- Low: The bottom of the vertical line represents the lowest price of the selected time period
- Close: The little horizontal line on the right represents the closing price.
Though the original bar charts are black and white, some brokers or trading platforms provide us the option for colored bar charts. Here, usually, a bullish bar is colored with blue/green and bearish bar is colored with red. As shown below:
Bar charts are typically used in a black and white format which helps to remove emotional bias from the trader’s mind. Usually, while we trade with only price action in mind, we prefer to use bar charts as this gives a cleaner interface.
How to Read Japanese Candlestick Charts?
Candlestick charts (or Japanese Candlestick charts) show the same price action information as a bar chart but in a much clear graphical format.
Candlestick bars (vertical bar) still indicate the high-and-low range. However, the thicker block (or body) in the middle shows the range between the opening and closing price.
Traditionally (the 1980's), if the thick block in the middle is filled (with black), then the price of the stock / currency pair closed lower than it opened.
If the closing price of the stock / forex pair is higher than the opening price, then the thick block in the middle will be hollow (unfilled) or “white”.
At present, after the invention of color monitors/televisions, we see those candles filled with colors. Generally, those candles are colored with Green or blue instead of white and red instead of black. This means that if the price closes above the open price, the candlestick would be green or blue. And if the price closed below the open price, the candlestick color would be red.
See the below image:
Below is a chart showing how a candlestick chart looks like for the same chart used in this tutorial.
The sole purpose of candlestick charting is to provide better visuals since the exact same information (OHLC) is provided by the bar chart.
The advantages of candlestick charting are:
- Candlesticks are much easier to read, and are a good mechanism for beginners to start learning chart analysis.
- Candlesticks are easy to use due to easy to understand visuals.
- Candlesticks and candlestick patterns have memorable names such as the "three white soldiers", “morning star” etc.
- Candlesticks work better in identifying reversal points using pattern analysis, i.e.- reversals from a downtrend to an uptrend or an uptrend to a downtrend.
If you really want to know more about Japanese Candlesticks the follow our in-depth article on What is Japanese Candlestick? How to use them in trading?
We hope that you have enjoyed the above article explaining how to read technical charts for stocks and forex trading. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about any of the three types of chart mentioned above, we will be happy to help you.