We will explain the construction of the line, bar, candlestick, point, and figure charts. Although there are other methods available, these are 4 of the most popular methods for displaying price data. So it’s time to learn how to create a chart.
Line charts are used when open, high, and low data points are not available. Some investors and traders consider the closing level to be more important than the open, high, or low. By paying attention to only the close, intraday swings can be ignored. Sometimes only closing data are available for certain indices, thinly-traded stocks, and intraday prices.
This is the Line chart.
Maybe the most popular charting method is the bar chart. The high, low, and close are required to form the price plot for each period of a bar chart. The high and low are represented by the top and bottom of the vertical bar and the close is the short horizontal line crossing the vertical bar. On a daily chart, each bar represents the high, low, and close for a particular day. Weekly charts would have a bar for each week based on Friday’s close and the high and low for that week.
This is an example of the Bar chart.
And we can recognize Candlestick Chart.
Originating in Japan over 300 years ago, candlestick charts have become quite popular in recent years. For a candlestick chart, the open, high, low, and close are all required. A daily candlestick is based on the open price, the intraday high and low, and the close. A weekly candlestick is based on Monday’s open, the weekly high-low range and Friday’s close.
Take a look.
Every bar or candle you see on your chart represents market action during the period of time covered by that bar or candle. A bar on a daily chart represents the range of prices for one day. Its vertical line connects the high and the low points of that day, while the tick on the left shows the opening price and the tick on the right the closing price. On a candlestick chart, the area between the opening and closing prices is thick. Candles are hollow if prices close above the opening price or filled if they close below the opening price.
Keeping an eye on the opening and closing ticks give the same information as candles, and you can fit more bars than candles on a computer screen. This course uses both bar charts, like candles. Let’s create a chart and examine it.
A bar on a weekly chart reflects price action for one week, on a monthly chart for one month, on an hourly chart for one hour, and so on. Markets move at the same time in different timeframes, but sometimes they trend in opposite directions. For example, the trend may be rising on the weekly chart but falling on the daily, challenging us to decide which one to follow. We’ll deal with that in a moment, but please keep in mind that for a truly stereo vision of any stock you must monitor it in more than one timeframe. Those who track a single timeframe miss important information.
Can you see the difference?
The key principle of using multiple timeframes is to make your strategic decision – to be a bull or a bear – on a longer-term chart, then switch to a shorter-term chart for making tactical decisions where to buy and sell. If the longer-term chart isn’t clear, don’t even bother going to the shorter-term chart but move on to the next stock. We should look for trades only when the strategic direction is clear.
Select two timeframes that relate to one another by approximately a factor of five. A weekly and daily chart makes a good pair. Other good pairs are monthly and weekly for very long-term trading or daily and hourly for shorter-term trading. The same approximate ratio applies to intraday charts, such as 30- and 5-minute. Watching at least two timeframes is like looking at the road ahead with both eyes. You wouldn’t want to drive with one eye closed.
Having selected a weekly and a daily pair, we’ll make our strategic decisions to buy, sell short, or stand aside on the weekly chart. We’ll fine-tune and implement those decisions on the daily chart.
So, we can conclude that a price chart is a sequence of prices plotted over a specific timeframe. In statistical terms, charts are referred to as time series plots.
Computerized technical analysis is more objective than classical charting. When an indicator is up, it’s up, and when it’s down, it’s down. There’s no game with the angle of a ruler.
Technical analysis software contains a wealth of indicators, but you aren’t going to use all of them. Compare this to sitting down in a restaurant and picking up a menu. You’re not going to order every item on the list, only select an appetizer, a main course, and a dessert. In trading, we need to select just a handful of indicators and learn to use them.
A perfect indicator doesn’t exist. Markets are complex; you cannot win using a single tool.
Some indicators work best during trends, others in trading ranges. Trends and ranges are easy to recognize in the middle of a chart, but the closer we get to the right edge, the foggier they become.
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The charts are a fundamental element of
What do the stock charts show?