As stated in the previous lesson, Introduction to Stock Charts, there are three main types of charts that are used by investors and traders.
The chart types are:
- line chart
- bar chart
- candlestick chart
A line chart is the most basic chart type. It is used mostly by investors to get basic stock price information. The line chart represents only the closing prices over a set period of time and is formed by a connected straight line from one closing price to another over the time frame.
Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.
A bar chart illustrates a visual representation of the price activity of a stock over a given period of time. This style of chart is used by some traders.
A bar chart, also called a OHLC chart, includes four price points for a given time period: an open, a high, a low and a close. Below is an example:
The opening price is shown on the left side of the bar. The top of the vertical line indicates the highest price the stock traded during the set time frame, and the bottom represents the lowest price. And finally, the closing price is displayed on the right side of the bar.
The bar chart expands on the line chart by adding several more key pieces of information to each data point. It gives you the ability to see whether a stock has increased or declined in value between the opening and closing in a set time frame. If the tic on the left is located lower than the tic on the right, you can imply that the stock has risen higher between the open and close of trading. This works for the opposite as well.
Candlestick charts have become very popular among traders in the last decade or so and have become the most commonly used chart that traders use nowadays.
A candlestick chart is similar to a bar chart, but is different in the way it is constructed. A candlestick features four data points: an open, a high, a low, and close.
Called a candlestick because it simply looks like a candlestick where it is usually composed of a body, and an upper and a lower shadow often called the wick.
The wick illustrates the highest and lowest traded prices of a stock during a particular time frame. The body illustrates the opening and closing trades.
Another feature of candlesticks is that it uses color to explain what has happened during the trading period. There are two types of color used; one color is used for an up candle and another for when the price falls.
Compared to traditional bar charts, many traders consider candlestick charts a better pictorial representation of the price action and easier to interpret. A trader is able to immediately compare the relationship between the open and close as well as the high and low.