Technical Analysis 101: Which Chart is Best for You?

Since the 1700s, analysts have been using charts to identify patterns.

In fact, at one time, Tokyo rice traders used them to look at prices over a fixed time frame to find patterns, especially candlestick patterns – which would allow them to gauge the probable actions of rice buyers and sellers.

As years went by, traders would take pricing figures off the tape and hand draw their own charts to see what was happening in a security.  Then, as technology advanced, traders came up with any type of chart they wanted in a matter of seconds.

However, when it comes to charting, it’s not all about studying lines and wiggles on a chart, it’s also about the type of chart you’re relying on, too.  There are four, including line charts, bar charts, candlestick charts (which we’ve spoken about), and the point and figure chart.

Today, we’ll discuss bar charts and line charts.  The point and figure involves a bit more analysis, which we can discuss shortly.

Line charts only represent the closing prices over a given period of time.  Typically, these charts don’t offer great visual information, or gauge what’s happening among the bulls and bears that are fighting against one another.  While it may offer the least amount of information to a trader, many believe the closing price is the most important prices of the day.  The very simplicity of lines can help identify trends.

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There are the candlestick formations, which we’ve begun discussing here.

The bar chart expands on the line chart by adding two key pieces of information.  It’s made up on vertical lines that represent the high and low points for a given trading period, along with the closing price.  The close and open are highlighted on each vertical line with a horizontal dash.  Open prices are illustrated with a dash on the left side of the vertical bar while the close of day is highlighted by a dash to the right of the bar. 

Typically, if the open price is lower that the close, it represents an up day for the stock, telling us it gained value.  A bar that is red tells us the stock has lost value that day.  Traders typically use bar charts to identify indecision among traders (much like a doji cross).

Again, when it comes to technical analysis, it’s not just the wiggles and lines on a chart that should concern you, it’s also the type of chart you’re using.  It’s all about individual comfort.

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