Types of chart
There are many ways to display price charts. Each has its own benefits, but at the end of the day, it is up to the individual to decide which provides the clearest visual picture and is likely to be of most help in identifying trends at an early stage. We will look at the most popular four types used by subscribers to Investors Intelligence:
Line Charts
This is the simplest chart format and is generated by using a line to join the data points. The most common use for line charts is for indicators that only have a single daily value (rather than high/low) such as momentum or moving averages.
The daily line chart is perhaps the simplest of charts available, showing only the closing price of each day. Bar Charts
As their name suggests, bar charts use vertical bars to represent price action for that day, drawn from the lowest price to the highest price.
High Price
The left-hand notch represents the opening price, and the right-hand notch represents the closing price.
Low Price
One of the advantages of bar charts is that a longer time period can be viewed by changing the scale from daily to weekly or monthly bars.
This is a daily HLC bar chart: each bar showing the days high, low, and close prices.
The period viewed is 6 months from November 2003 to April 2004.
This is a weekly bar chart: each bar showing the weekly high, low, and close.
The period covered is two years, from April 2002 to April 2004, and shows the movement in the daily chart (bottom right area) in its longer-term context.
Candlestick Charts
Candlestick charts provide a more sophisticated visual representation of bar charts. The opening price is included in the chart, and a day's activity would be represented as follows:
Note: an up day is signified by a white (or empty) box.
A down day is represented by a black or shaded box.
The "box" shows the open-to-close range.
The "wick" displays the full day's range.
Candlestick charts are generally plotted over a one-day period, but technical analysts also use weekly and monthly candlestick charts to provide a valuable picture of the longer-term price action. Candlestick charting is one of the oldest methods of technical analysis, with both Japanese and Chinese both claiming that rice traders were using candlestick charts over 4000 years ago, although this is not proven. Its appeal lies in its ability to give a clear visual representation of the price action during a period, leading to easy-to-recognize pattern recognition.
The candle chart displays a wealth of price information, with open, high, low, and close.
There is a separate article on candlesticks in our University section.
Point & Figure Charts
Point & Figure charts have a devoted following, particularly amongst Wall Street operators. They are unique in several ways:
a) They have no time scale, only registering changes when significant price action occurs.
b) P&F charts box scale serves as a "noise reduction" system thereby eliminating minor movements so that the primary trend characteristics are revealed to the user.
c) They quickly filter out the most consistently trending stocks or financial instruments from erratic and trend-less ones.
Areas of congestion on the charts define the key areas of supply and demand for a security (commonly known as support and resistance).
The P&F chart differs from the previous two charts in that it displays price data without any time input, giving an accurate depiction of trend.
There is further discussion on point & figure charts in our University section.