3 IMPORTANT TYPES OF PRICE CHARTS FOR TRADING

Price charts are one of the most important tools used for trend analysis in stock, commodities and forex trading. Price charts are graphical representations of the changes in the trading volume or price of a stock. Technical analysis involves recognizing the pattern of changes by plotting them on various charts, using different relationships.

Like any other chart, forex price charts also consist of an X-axis and a Y-axis. While the X-axis represents different time periods, the Y-axis represents various data corresponding to that time period, like price level or trade volumes. Charts can be prepared for any time periods, ranging from intra-day to few months. Though there are many instruments used by technical analysts, there are three types of price charts that are extremely popular. These include:

1. Line Chart: A line chart is one of the most widely-used types of chart that resembles a basic graph. This kind of chart is usually used to track the closing prices of a stock over a certain period of time. The different prices are represented by a data point on the graph. All these points are then joined by a single line that goes form the left to the right. Though this is a very simple representation, it helps the traders in getting an overview of the historical price changes and spotting trends. One common use of the line chart is to foresee potential break points and price inflexions.

LINE CHART

2. Bar Charts: The Bar Charts are also known as OHLC (open-high-low-close) charts. These are often regarded as the western model of Japanese candlesticks. In a bar chart, a vertical line is used to represent the highest and the lowest price level of the stock, while short horizontal lines extending to the left and the right represent the opening and the closing price levels of the stock respectively. The bar chart provides better insight into the volatility of the stock. Longer bar lines represent too much volatility in the trading of the stock. Often, the bars are coloured according to the net performance of the stock – green for gain and red for loss. Too many red lines in the chart indicate that the stock has been facing severe losses.

SINGLE BAR DEPICTING THE OPENING, HIGHEST, CLOSING AND LOWEST PRICE LEVELS

BAR CHART

3. Candlestick Charts: Candlestick chart is the most popular type of chart used by traders for technical analysis. The price movements of the stock are used to generate a candlestick which is plotted on the chart. Each candlestick consists of three parts - the upper tail, the body and the lower tail. The body of the candlestick represents the change in the price, composed of the opening and closing price of the period. To indicate the net change, the body is coloured in different shades. A rising candlestick generally has a white or clear body, while a falling candlestick generally has a red or black body. The tails or wicks extending from the bottom and top of the body represent the highest and the lowest price level of the stock during that specific period.

INDIVIDUAL CANDLESTICKS – RED FOR FALLING PRICES AND GREEN FOR RISING PRICES

CANDLESTICK CHART

Charts are the main instruments used by traders for technical analysis. Apart from these three, point and figure charts are also used by many. To be able to make informed decisions, it is crucial for traders to read and understand the information represented in a chart. This will go a big way in helping traders identify different price patterns.