Chart Construction

1. Line Chart

In a line chart, the closing prices are connected with a line, which shows the general direction of the market.

  • Key Feature: Provides an easy-to-understand overview of price movement.
  • Audience: Good tool for a non-specialized audience.
  • Limitation: Uses only the closing price. It sacrifices finer details and does not show the open, high, or low prices.

2. Bar Chart

A bar represents the full range of price movement for a specific time period (e.g., a day, an hour, or a minute).

Construction of a Bar

The bar is constructed using four key price points:

  1. The High and Low prices determine the length of the vertical line, which represents the range of the period.
  2. The Open price is shown with a horizontal tick on the left.
  3. The Close price is shown with a horizontal tick on the right.

Analysis and Usage

  • Advantages: Widely used in technical analysis. Shows all important price elements (open, close, high, low) and clearly outlines tops and bottoms.
  • Limitation: The extra information may obscure the overall message, requiring experience to interpret the signals from different types of bars.

3. Candlestick Chart

Candlestick charts are considered the Japanese version of bar charts and provide a strong visual insight into price action.

Construction of a Candlestick

  • The Body: A box is drawn between the Open and Close prices of the period.
  • Shadows (Wicks): Vertical lines extend from the body to the High and Low prices.
  • Color: Differentiates between bullish and bearish sentiment:
    • Bullish Candle (Green/White): The Close is higher than the Open.
    • Bearish Candle (Red/Black): The Close is lower than the Open.

Analysis and Usage

  • Advantages: Very popular, shows all important price elements, provides a visual insight, and candlestick patterns are often used as triggers for buy and sell signals.
  • Limitation: Similar to bar charts, the extra detail may obscure the overall message, requiring experience for interpretation.

Comparison of Bar Charts and Candlestick Charts

Bars and candles are very similar, but their coloring mechanism differs significantly:

  • Bar Chart Coloring: Compares the current Close to the previous Close.
  • Candlestick Chart Coloring: Compares the current Close to its Open.

This difference means that the same price movement can result in a different color on the two chart types.

Note: Both bar charts and candlestick charts can be used effectively to identify market turning points.

Detailed Summary

This text outlines the construction, features, advantages, and limitations of the three most popular types of price charts used to illustrate price action: the Line Chart, the Bar Chart, and the Candlestick Chart. The Line Chart provides a simplified overview using only closing prices. Both the Bar Chart and the Candlestick Chart display the four key price points (Open, High, Low, Close), making them essential tools for technical analysis, though they require more experience to interpret. A key distinction is their coloring mechanism: Bar Charts compare the current Close to the previous Close, while Candlestick Charts compare the current Close to their Open price to indicate bullish or bearish sentiment.

Key Takeaways

  • The three most popular price chart types are the Line Chart, the Bar Chart, and the Candlestick Chart.
  • The Line Chart connects closing prices, offering an easy-to-understand overview suitable for a non-specialized audience.
  • The Line Chart's main limitation is that it sacrifices detail by only using the closing price.
  • The Bar Chart uses vertical lines to show the High/Low range, with horizontal ticks indicating the Open (left) and Close (right) prices.
  • The Candlestick Chart is the Japanese version of the bar chart, providing a strong visual insight.
  • A candlestick consists of a Body (between Open and Close) and Shadows/Wicks (to High and Low prices).
  • Candlestick color indicates sentiment: Green/White (Bullish) means Close > Open; Red/Black (Bearish) means Close < Open.
  • Both Bar Charts and Candlestick Charts display the Open, Close, High, and Low prices, but their detail may obscure the overall message for inexperienced users.
  • Coloring difference: Bar charts compare the current Close to the previous Close, while candlestick charts compare the current Close to its Open.
  • Both bar and candlestick charts are effective for identifying market turning points.