Types of Charts Used in Technical Analysis | A Complete Beginner’s Guide to Technical Analysis (Part 4)
Traders who use the technical analysis method in forecasting stock prices are brilliant in their craft. They have the uncanny skills to recognize trends and patterns of equity prices by using charts. For these expert chartists, it’s the easiest way to determine price movements and spot earning opportunities.
If you’re fascinated with charts in the same way these experts are, it is to your advantage to be familiar with the types of charts used in stock trading. The charts are utilized for specific purposes to improve trading competence.
The Types of Charts
Charting in the stock market used to be hand-drawn. But nowadays, traders greatly benefit from the charting performed by computers installed with advanced software. There is a concise presentation of the price and volume data of stocks over a stated timeframe. It can also lend assistance to fundamental analysts when correlating market responses to certain events.
Market volatility can also be picked up from the charts. Thus, technical analysts can execute trades in a timely fashion, whether in buying or selling mode. Risks can be mitigated too in case there’s a need to signal and place trade stops.
There are four main charts used in technical analysis. Each of these charts has a specific use. Its utilization will depend on the information required and the desired investment objectives.
1. Line Chart
The main and basic chart type is the line chart. For the line charts, you can already see price movements within a timeframe. Usually, it shows the closing prices of market indices or stocks over a set period. When connecting the closing prices for each trading session, it forms the line.
CapitaLand Ltd (SGX: C31) YTD Line Chart
Although the line chart is straightforward and uncomplicated, it can serve the following purposes:
- By reviewing a line chart over time intervals or time series, trends or patterns are easily visualized.
- The revealed trend shows a definite or likely direction which helps in making quick decisions when prompted. Many traders are particular about closing prices and the line graph is the common reference.
- The simplicity of the chart already makes it a powerful trading tool. Data is compressed and the price trend is presented in a plain, recognizable way.
- Other traders plot prices and price movements of multiple stocks in one graph for comparison purposes. Even line graphs of market indices can be compared and analyzed in a single graph.
2. Bar Chart or OHLC Chart
A bar chart in the stock market is basically an expanded line chart. Bars take the place of lines and each bar contains 4 prices – Opening, High, Low, and Closing (OHLC) – in a given trading session. The addition of the set of prices or ‘price bar’ is the salient feature of this chart type.
- The ‘price’ bar shows detailed information as to daily price and trading range of a stock under review.
- The bar chart is not difficult for a trader to analyze. The horizontal dash on the left is the opening price while the horizontal dash seen on the right is the closing price. The topmost part of the bar is the highest traded price and the bottom part is the lowest traded price for the day.
CapitaLand Ltd (SGX: C31) YTD Bar Chart
- If the bars are color coded, a black-shaded bar means the closing price is higher than the opening price. Inversely, a red-shaded bar indicates the stock price closed lower than the opening price.
3. Candlestick chart
Certified financial technicians find the candlestick chart as the most appealing and reliable among all charts. It makes reading price movements easier. Similar to the bar chart, there is a noticeable thin vertical line displaying the price range for a given period. However, the prices are formed in the shape of a candlestick.
- While this chart contains the same set of prices featured in a bar chart, patterns appear in vivid detail. The chart utilizes the opening, high, low and closing price data per specified time interval to generate a candlestick, which is plotted on a price chart.
- The candlestick is essentially the ‘real’ body and represents the opening and closing prices, shaded in different colors, based on whether the stock closed higher or lower for easier identification. Red is always the color for lower closing prices.
CapitaLand Ltd (SGX: C31) YTD Candlestick Chart
- Traders can also identify the buying or selling pressures from the candlesticks. When the closing price is higher than the opening, it forms a hollow candlestick (buying pressure). A filled candlestick forms when the closing price is lower than the opening, signifying a selling pressure.
- Candlesticks are used to compare the relationship between the opening and closing prices as well as the highs and lows. There is an emphasis on the opening and closing prices because they are trade signals and crucial to winning trades.
4. Point and Figure chart
This chart is also relevant but is not as popular as the three charts. The chart monitors price movements without considering time intervals or volume. As such, it eliminates the ‘noise’ or inconsequential price movements that can obstruct a trader’s view of the overall trend.
- The chart is a simple tool to analyze price movements through the series of columns represented as X’s (upward trend) and O’s (downward).
- It is easier to follow trends and draw trend lines that are non-linear like the line, bar or candlestick charts. The X columns represent the rising prices while the O columns represent the falling prices.
Charting your way to a winning trade
Technical analysts navigate the stock market using charts. Singapore is known to have some of the best traders with in-depth knowledge of stock charts. Reading charts is like following a roadmap based on historical data and current conditions. Traders who have acquired the expertise in stock chart analysis can envision potential opportunities as well as risks during stock trading.
If you desire to be a better trader, familiarize yourself with the different types of charts and how each chart functions. It will enable you to perform and execute trades with confidence. That is the premium advantage one derives when using technical analysis.