Charts are obviously important tools for technical analysts to use. But they aren’t necessarily a “one size fits all” kind of arrangement. Rather, different charts can be used to not only drive different aspects of information but to also fit the comfort zone and skill level of the investor. There are four primary chart types that investors use: candlestick; bar; line; and point and figure. While each chart acts independently from the other, they all work to produce the same endgame – generate profits for the technical analyst.
Basic Beginnings: A Look at a Line Chart
If you’re new to the world of technical analysis, you’re probably going to become initially familiar with a line chart first. The reason for this is because it’s the simplest chart that an investor can use. As the name of the chart implies, the investor will see a line plotted on a chart. This line merely represents the closing price of a specific stock over a given time frame. The chart doesn’t concern itself with the minutiae of stock activity within a day, such as indicated highs or lows. Instead, it provides investors with the piece of data that is considered by many to be the most important piece of data that can extrapolate from a chart when the dust has settled.
This particular chart can be particularly attractive to newbies because it provides an easy baseline for them to be comfortable with as their market acumen broadens. Perhaps most importantly, it will prevent the fresh investor from feeling overwhelmed once they dip their toe into the world of technical analysis. Because the stock market’s volatile nature makes it an environment propelled by speed, using a chart as a means to slow the pace can be quite vital.
Bar Charts: Taking it to the Next Level
Once a technical analyst gets comfortable with reading and utilizing the most basic chart, they can progress to the bar chart, which in some respects can be considered a progressive riff on the line chart. A bar chart expands on the line chart by adding a few more vital bits of info to each data point, such as the day’s highest price, the day’s lowest price, and the opening price. These metrics are indicated through the inclusion of differently colored vertical lines that hold these extra data points through any given day. The precise data points themselves are represented by horizontal dashes that protrude from the extra line, and the direction of the protrusion correlate with a particular data metric. For instance, the opening price dash will stick out to the left of the bar, while the closing price will stick out to the right.
The bars’ colors will provide technical analysts quick information on stock performance. Generally speaking, a black bar will represent a stock that has gained value, while a red bar will indicate a stock that lost value. Investors new to reading the chart may think of a stock as being “in the black” or “in the red” as a handy on-the-fly reminder of what the colored dashes represent.
Candlestick Charts – Similar, yet Different
In a way, you can view a candlestick chart as a variation of a bar chart. Candlestick charts will also be dotted with differently-colored vertical lines to represent broader trading metrics like their bar chart counterparts. However, instead of dashes, candlestick charts utilize the formation of bar width to indicate opening and closing price.
Think of a line on a candlestick as a block suspended in mid-air by strings. The top (or bottom) of the “string” represents the high or low price of the day. The part of the string connected to the “block” is the opening or closing price, depending on what string you’re looking at. The block will be filled in by a color, and this hue will indicate whether or not the stock closed higher or lower.
Here’s the tricky part: these colors aren’t universal, nor do they exactly correlate to the colors found on a bar chart. On a candlestick chart, a stock that finishes up can be colored either white, green, or clear, while a stock that finishes down can be shaded red or black. It’s important that the investor confirms what color is being used with whatever site they’re using to mine data to ensure unwitting misreads (and mistakes) aren’t being made.
Point and Figure Charts – The Old-School Chart
The average technical analyst will seldom if ever use a point and figure chart. However, its existence is worth noting because it has a long history; one that traces back to the first wave of traders that utilized technical analysis tactics. This particular chart uses a series of X’s and O’s to indicate price movement; X’s indicate upward trends, while O’s represent downward trends. There are also other minimally intrusive data on the chart that reflects metrics like month and price scale.
Point and figure charts can be effective because they track price movements, but it does so in a way that strips away things that are considered insignificant price movements relating to the stock’s overall performance. The goal with the chart is to eliminate the clutter that may unwittingly run interference with how a stock’s moves, yet at the same time retaining certain metrics to give a complete view of how a stock may be trending.
The Importance of Thorough Understanding
Whatever chart is ultimately utilized, it’s of the utmost of importance for an investor to gain a thorough knowledge of how the chart should be interpreted before it is used. This doesn’t mean having a fairly decent grasp on how they operate, either – in the world of the stock market, merely having a “decent grasp” can far too often lead to good opportunities slip through your fingers.
However, once a thorough knowledge has been established, the savvy investor can use the chart of their choice as an effective tool to maximize profits and mitigate losses. And when you boil down the market to its most essential elements, could you ask for anything beyond this?