Technical analysts use charts to “diagnose” a stock investment’s situation the same way any analyst uses different tools and approaches. Different charts provide fresh angles for viewing the data. In terms of visualization and utility, the following are the four most common charts used in technical analysis.
A chart simply shows a series of prices plotted in a graph that displays how the price has moved over a period of time. The period of time can be a day, week, month, year, or longer. The prices that are usually chosen for a line chart are the closing prices for those market days.
With a yearlong line chart, you can see how the stock has progressed during the 12-month period, and you can do some simple analysis. When were the peaks? How about the troughs? What were the strongest seasons for this stock’s price movement?
It can be beneficial to focus on the longer term because positive results can be easier to achieve.
Bar charts are a little fancier. Whereas the line chart only gives you the closing prices for each market day, the bar chart gives you the range of trading prices for each day during the chosen time period. Each trading day is a vertical line that represents the price movements, and you see the stock’s high, low, and closing prices.
In a bar chart, the vertical line has two notches. The notch on the left indicates the opening price, and the notch on the right indicates the closing price.
If the opening price notch is higher than the closing price notch, the line is in red to indicate that the closing price of the stock declined versus the opening price. An up day is in black, and the closing price notch is higher than the opening price notch.
Candlestick charts have been all the rage in recent years. They’re basically bar charts, but they’re a little more complex. A candlestick chart provides a more complete picture by adding a visualization of other data that simple charts don’t contain, such as the high, low, and closing price of the security the chart is tracking.
It stands to reason that because candlestick charts provide more information in a visual form than bar charts, they can provide more guidance in trading. Candlestick charting is too involved to adequately describe in this space, so please continue your research.
The full name for these charts is Japanese candlestick charts because they originated as a form of technical analysis in the 17th century, when the Japanese were trading in rice markets. You know, they do look like candlesticks.
A more obscure chart that chartists use is the point-and-figure chart. When you look at it, you’ll notice a series of X’s and O’s. The X’s represent upward price trends, and the O’s represent downward price trends. This type of chart enables the stock trader to easily determine which prices are “support levels” and which are “resistance levels” to better judge buy and sell prices.