Technical Analysis: How to Read a Basic Price Bar - dummies

Technical Analysis: How to Read a Basic Price Bar

By Barbara Rockefeller

Part of Technical Analysis For Dummies Cheat Sheet

The price bar, the basic building block of technical analysis, describes and defines the trading action in a stock security for a given period. Trading action means all the real-money transactions conducted during the period.

Know how to read market sentiment in the components of the standard bar. If the bar is tall, it was a battle between buyers (bulls) and sellers (bears). If the bar is short, it was a pillow fight.

Here’s a look at a standard price bar:

price bar

Most market indicators are nothing more than an arithmetic manipulation of the four standard price bar components. The components are easy to learn and interpretation is fairly obvious once you review their meaning:

  • Open: The little horizontal line, or tick mark, on the left is the opening price.

  • High: The top of the vertical line defines the high of the day.

  • Low: The bottom of the vertical line defines the low of the day.

  • Close: The tick mark line on the right is the closing price.

Get ready to buy the security if it has a series of higher highs and higher closes. Higher highs and higher closes indicate demand for the security is outstripping current supply — buyers outnumber sellers. The opposite is true, too — lower lows and lower closes mean you should get ready to sell, because sellers are overwhelming buyers.

What if the price bars aren’t consistently offering higher or lower closes? This situation is called congestion, and you should hold off trading the security until you see a trend. A trend can be identified by connecting a series of price bars to form a support or resistance line and looking for a directional slope. You can also use a series of bars to create a moving average, simple or fancy, to do the same thing — discern a directional slope. On the whole, technical analysis seeks to identify trends to aid your trading decisions, and trends start with the bar.