The Different Types of Charts
Line Charts
These charts are the most basic type of chart, and in most cases, they are generally used for spread trading and longer-term analysis. They are also helpful when only the closing date is available or in markets where high and low price information is not measured accurately. Most charting analysis works well with this kind of chart, although momentum indicators that use intra-day price highs and lows don’t work particularly well. These types of charts also don’t plot price gap’s in the market well either.
Bar Charts
These are commonly used charts, particularly in the United States, and unlike a simple line chart, they are constructed using data of the high, low and close of a specified time/trading period. The trading time period of the bars can be built using minutes, hours, a day, weeks, months, or a year.
They help identify patterns, especially for support and resistance, and unlike line charts, they give you an idea of how much the market has moved during a given day which is identified by the length of the bar.
The picture below demonstrates how a bar is constructed.
The picture below shows how the chart looks when you put bars together.
Candlestick Charts
Japanese rice traders developed candlestick charts in the 17th century to have an accessible overview of open, high, low and close prices over a certain period. This charting style is very popular because of easiness of reading and understanding the charts. Since the 17th century, there have been many efforts to relate chart patterns to its behaviour in the future.
This method of chart prices proved to be particularly interesting because four data points could be displayed instead of one single data point, thus containing more information. Those Japanese rice traders also found that the charts resulting from those candlesticks would provide a fairly reliable tool to predict future demand, thus allowing them to take advantage of future price fluctuations.
Below is the construction of the candlestick, which, unlike bar charts, shows two colours depending on whether the price went up or down at that particular period.
Candlesticks are usually composed of a central coloured body and two shadow lines: an upper head and a lower tail. However, a candlestick does not necessarily need body and/or wick. The trading range in terms of opening, high, low, and closing price determines the shape of the candlestick. A white (or green or blue) body signals a higher closing price than the opening price. In contrast, a black (or occasionally red) body indicates a lower closing price than the opening price.
Below is a construction of bars that make up a candlestick chart.
How candlestick charts are constructed makes common patterns that do not necessarily rely on other technical indicators. Traders may use these patterns to form a consensus on market direction, especially during periods of heavy trading volume and after significant moves in the market.
Below, we will explore some of the basic candlestick patterns and what possible outcomes they may have when making a trading decision.
Long Days
Long Days indicate a significant difference between the open and close prices for a trading day. The shadow lines are much shorter than the real body.
Short Days
Short Days indicate a small difference between the open price and the close price for a trading day. Both the body and the shadow lines are very short.
Marubozu
A White Marubozu is a long bullish body with no shadows which indicates a bullish trend. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.
A Black Marubozu is a long bearish body with no shadows. It usually implies bearish continuation or bearish reversal.
Spinning Tops
The Spinning Tops have longer shadows than the real body. The colour of the real bodies is not very important. The pattern indicates indecision between the bullish and bearish trends.
Doji
Doji lines are patterns with the same open and close price. There are four special types of Doji lines.
- The Long-legged Doji has a long upper and lower shadows with the price in the middle of the range. It indicates indecision of traders.
- The Dragonfly Doji has a long lower shadow and no upper shadow. It is a good indication of bearish trend reversal.
- Gravestone Doji line has a long upper shadow and no lower shadow. It is a good indication of bullish trend reversal.
- Four Price Doji’s all prices: open, high, low and close are the same for a trading day. It’s a very unique line indicating the indecision of the traders, or very quiet market.
