An OHLC Bar Chart
Stock charts are the foundation of technical analysis to the extent that technical analysts use charts almost exclusively. Stock charts provide a graphical representation that depicts price action and market data of the underlying security in a structured format. To the skilled chart reader, it provides an insight to the psychology of traders and balance of buying and selling pressure at that point in time and makes the recognition of trend lines and chart patterns possible.
Modern charting and trading software have made charting a far less cumbersome process of drawing price movements on graph paper, reducing it to a very simple practice that can be accomplished in a few clicks. This has allowed technical analysts to shift quickly between different time frames and to quickly apply a range of technical indicators to a price chart.
Types of Stock Charts
However, there are different types of charts that can be used in technical analysis. These include the popular bar charts, candlestick charts, and line charts, as well as the more recent point and figure charts, kagi charts and renko charts.
Candlestick charting, Kagi charts and Renko charts were all developed in Japan. They were introduced to the western world by Steve Nison, in his books, Japanese Candlestick Charting Techniques and Beyond Candlesticks: New Japanese Charting Techniques Revealed.
With the exception of the more recent point and figure charts, kagi charts and renko charts, which only plots a price change when a new high or low is made, all charts plot price action for a specific duration of time, which is called the time-frame or periodicity, on a graph with the time on the horizontal axis and the price levels on the vertical axis. However, each of these types of chart plots price action differently, and displays different information about the price action in a given time-frame.
Bar charts and candlestick charts are the most widely used price charts, followed by line charts. Point and Figure charts, Kagi charts and Renko charts are not as widely used as they do not plot price action over a given time-frame. They also do not keep track of volume levels. For these reasons, oscillators and moving averages that are dependent on a fixed time-frame cannot be applied to these types of charts.
Line charts are the simplest types of stock charts and were favored by Charles Dow, who is widely considered as the father of technical analysis. Charles Dow felt that the closing price of a stock was the most important price to consider in analysis as it determined each period's unrealized profit or loss. Dow felt that plotting the highs and lows of the period obscure the real value of the stock, which, he argued, is determined solely by the period's close price.
Line charts are popular with traders who rely more on chart patterns for trading signals as ...
Candlestick charts have become popular in the West since the 1980s but they date back from the 1700s. The evolution of candlestick charts are generally attributed to the trading principles of a Japanese rice trader named Munehisa Homma who traded rice in 18th century Japan.
In candlestick charts plot the open price and the close price for the period to form the solid body of the candlestick. The high price and the low price are plotted as the upper and lower shadow, respectively. In this respect, they display the same information as OHLC bar ...
Renko charts are similar to Point and Figure Charts but use boxes or bricks instead of X’s and 0’s with each brick being arranged diagonally when the price closes a pre-determined amount above or below the previous brick. The pre-determined amount is called the point size and a new brick is drawn for every multiple of the point size that the price moves to at the close.
No brick is drawn if the point size is not reached. This means that a brick can represent the price movement of one day or a many days. Similarly, the ...
Point and Figure Charts
The Point and Figure (P&F) chart differs from the traditional bar chart as it does not plot price movement over time. Instead it plots unidirectional price movements in one vertical column and moves to the next column when the price moves in the opposite direction. It represent an increase in price by plotting X's in the column and a decrease in price by plotting O's. Each X and O represents a box of a set size or price amount.
The chart also has a box reversal amount that determines how many boxes must occur in ...