The Technical Analysis Chart is a vital tool for short-term traders. As we have seen that prices of the stocks are plotted on the chart with the price on the Y – axis and time on the X- axis, we now move on to how these charts are formed and also the types of charts. You could have noticed in your terminal that the price of shares or securities changes every second during trading hours. Some stocks go up while some may go down. It is from these price differences, a trader makes money.
The tick-by-tick price changes for each and every stock are plotted in charts to analyze the trend in the market. There are many types of charts that are used for technical analysis. However, the three types that are most common are
A line chart is a simple chart, as it uses only one data point to form a chart. If the chart is loaded for a daily time frame, then the line chart uses the previous day’s closing price as a data point. The closing price of the stock is plotted against the time period on the charting platform. A line is drawn by connecting all the prices of the stock and the line chart is formed.
Look at the below chart. ICICIBank stock has been selected. The time period is set as daily. The closing price of ICICIBank is plotted and all the closing prices have been joined to format a line chart. From the line chart, we can conclude that since mid-June 2023, ICICIBank stock has been rising up. Similarly, all stocks trend can be identified with the help of a line chart using just one data point.
Line charts can be used in all time frames like 1 minute, 15 minutes, daily, weekly, etc. Say for example if we use 15 minutes chart, then the price for every 15 minutes is plotted and joined to form a line chart. Line charts are not preferred among traders as it is having just a single data point. We can’t able to predict, the day’s High price and Close price of a stock with the help of a line chart. Generally, we can see the overall trend of the market using a line chart.
A bar chart is a much more advanced chart type than a line chart. As we have seen a line chart uses only one data point, and a bar chart uses four data points. The four data points used in a bar chart are
Using the above said four data points, a bar chart is formed. In a bar chart, there are three components, they are
From the above two images, you can observe that one bar is in green and another is in red. The green bar represents the stock is positive. When the closing price of a stock is higher than the opening price of a stock, then a green bar is formed(you can change color according to your wish). If the stock price closes below the opening price then a red bar is formed.
Let’s take an example. Below is the chart of ICICIBank, loaded in a daily time frame. In a day, ICICIBank stock will have four price levels Open(O), High(H), Low(L), and Close price(C). All the prices are marked and a bar is formed in the chart.
Even though the bar chart represents four data points, it is not used among technical analysts as it is a little bit confusing. The left and right marks are usually confused among traders when they use small timeframes. The main reason for traders to avoid bar charts is that they have much more sophisticated chart patterns “Japanese Candlestick Charts” than bar charts. In the upcoming session, we will see about Candlestick charts.
While people are struggling with line and bar charts, Candlestick charts originated in Japan over 100 years before the West developed the bar charts. The candlestick chart patterns were discovered around the 1700s by a Japanese man named Homma.
Candlestick charts use the same four data points as bar charts. Unlike bar charts, candlestick charts look just like a candle. It has a wider body. The open and close price of a stock is marked on the body’s upper and lower parts. The other two prices high and low are marked as wicks of a candle. The line at the upper end signifies the day’s highest trading price. The line at the lower end signifies the day’s lowest trading price.
From the above two images, you can observe that one candle is in green and another is in red. The green candle represents the stock is positive. When the closing price of a stock is higher than the opening price of a stock, then a green candle is formed(you can change color according to your wish). If the stock price closes below the opening price then a red candle is formed. The wick on the upper part of the body is called “Upper Shadow” and the wick on the lower part of the body is called lower shadow.
Green candles represent bullish, red candles show bearish. Some candles are long and some may be short. Candle formation depends on the price of the stock. Let’s take Dr.Reddy’s laboratory stock. Below are the four data points on July 26th, 2023. As the close price is high than the open price, the candle is in green.
Below are the four data points on July 27th, 2023. As the close price is lower than the open price, the candle is in red.
With the candles, we can identify overall market trends and it is much more helpful to take trades at the best price. Candlestick charts became more famous among traders with its peers. With these charts, more chart patterns and indicators are developed to guide traders and investors. Short-term traders used timeframes starting from 1 minute to daily. Investors along with fundamental analysis, use technical analysis yearly and weekly charts to analyze the stocks’ best buy price and also the overall trend in the market.
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