If you’ve ever been tempted to try your hand at technical analysis—the system of reading stock charts for patterns — then this article is for you.
First of all, not every stock chart shows price data the same way. There are 3 different kinds of charts. Here’s an overview of what they are and how they differ.
Line charts are the simplest type of stock chart. Line charts are basically the same as the simple line graphs we all learned about in grade school. For those who need a refresher course, the x-axis (horizontal) is time and the y-axis (vertical) is price.
Because of their very basic nature, there’s very little information that can be gleaned from a line chart. However, line charts can still be used to identify trends, which are extremely helpful to know. By determining a positive or negative slope, you can tell whether a stock has bullish or bearish momentum. In addition, by drawing trend lines to connect all the peaks and then connect all the troughs in the chart, you can determine trading channels that indicate potential buy and sell points.
Bar charts, also known as Open-High-Low-Close charts, give traders another level of information about a stock’s trading history. Rather than counting a standard period of time (one hour, one day, one week, etc.) as a single point on the chart like a line chart does, a bar chart represents each period as a bar.
Each bar has several pieces of information included. A stock’s opening price is denoted by the horizontal “foot” pointed to the left side of the bar. The stock’s highest price of the period is the top of the vertical bar, and its lowest price of the period is the bottom of the bar. Its closing price is the right “foot.” Each bar also tells a trader the direction a stock moved throughout the period (by comparing the opening and closing prices) and the stock’s range or volatility during the period (by comparing the top and bottom of the bar).
Candlestick charts are one of the most popular chart types for technical traders. Candlestick charts convey all the same information that is contained in a bar chart, but in a different form.
The opening and closing prices are denoted by the tops and bottoms of the body of the “candle,” and the high and low prices of the period are represented by the tails or “wicks” extending out of the top and bottom of the candle. In addition, relative trading direction is indicated by whether or not the body of the candle is filled. A filled body means the closing price is below the opening price, whereas an unfilled body represents a closing price above the opening price. If one period’s closing price is higher than the prior period’s closing price, the candle will typically be green, whereas a lower close than the prior period’s close will usually be colored red.
Bar and candlestick charts tend to be the charts of choice for technical traders simply because of the amount of information they convey. Once traders are comfortable with reading these charts and recognizing trends, they can get to work studying the dozens of signals, patterns and trading strategies that technical analysts use to profit off of them.