Have you been indulging in the stock market lately? Well, here is a blog explaining 3 basic as well as popular types of charts used to technically analyse the financial markets, namely
Line Charts,
Candlestick Charts and
Bar Charts.
Line Charts
Amongst the various types of charts available under the technical analysis method for equity analysis, line charts are considered to be the simplest form of graphical representation.
What are line charts?
Line charts are used to display the value of something over a period of time. They are basically a graphical representation of the closing price of an instrument in a particular time frame. Every point on a line chart displays the closing price of a security over a period of time. It can be any time frame but the most common is the day to day price changes.
Components
A line chart comprises a horizontal x-axis and a vertical y-axis. The independent factor, which is time, in this case, is plotted on the x-axis whereas the factor-dependent on time i.e. money, is plotted on the y-axis. Thus, the line chart depicts the movement in the closing prices of various commodities over a period of time. Multiple lines in various colours can be plotted on a single axis so as to compare the performance of two instruments.
Reliability
Line charts are still used by a lot of people indulging in the financial markets as they are easy to read and are very useful in tracking changes over a short period of time. Although line charts are easy to read and can be understood better by a beginner as compared to other means of graphical representation, it simply lacks the intricate details like the opening price and the extreme prices touched by an instrument within a particular time frame. To overcome these shortcomings, people use various kinds of charts such as bar charts or candlestick charts, as they include intricate details about the movement in prices of various instruments.
Candlestick Chart
What is the Candlestick Chart?
A Candlestick Chart comes under the technical analysis method of equity analysis.
It provides us with the opening price, the closing price as well as the highest and the lowest price of a particular security, derivative or currency on each day, during a week, month or even a year. It is called a Candlestick Chart because the shape of the bar which depicts the movement in the price of various securities, commodities and derivatives, is a candle.
Where did it all begin?
Candlestick Charts are believed to be originated in the 18th century, by a Japanese rice trader named Munehisa Homma.
Components
A candlestick consists of a body which denotes the opening and the closing price of an instrument. It has tails on both sides of the body which depict the highest and the lowest price touched within a particular time frame. The colour of the candle turns green/white when the price of a particular instrument rises and switches to red/black if its price falls with respect to its opening price.
Reliability
Although candlestick charts have a high degree of accuracy, it is difficult for anyone to be a successful trader solely on the basis of candlestick charts and its patterns. Therefore, one needs to learn more about various methods of technical analysis and combine the knowledge with candlestick charts to see positive results. Still, a candlestick chart is better than its alternatives such as line or bar charts as the information provided is more detailed, specific as well as granular.
We can conclude that although Candlestick Charts provide highly accurate data regarding the movement in prices of various instruments, one needs to acquire more knowledge about various types of analysis so as to use the charts to their full potential.
Bar Charts
Bar Charts are very similar to Candlestick charts. In fact, it provides us with the exact information that a Candlestick chart does, i.e. the opening price, the closing price as well as the highest and the lowest price of a particular security, derivative or currency in various timeframes.
Then what is the difference? Well, all the information is presented in a slightly different manner in a bar graph than it is on the candlestick chart.
Instead of providing the information in the shape of Candlestick, it displays the entire information in the format of a bar graph. Also, instead of having tails on both the sides, it depicts the opening price of an instrument with the help a left horizontal line whereas the closing price of the instrument is depicted in the form of a right horizontal line on either side of a bar.
The colour of a bar chart is green when the closing price of an instrument is higher than its opening price and turns red when the opposite happens. We can also read a bar chart consisting of black bars, with the help of the horizontal lines.
Since Bar charts provide the same information that Candlestick Charts do, they are equally reliable. It is just a matter of personal preference as the outcome remains the same.
Write-up by: Rishi Raniwala
Very well explained!