If you’re new to the trading game, and you’re not a Ph.D. in Economics,
then charts are the way to go. The most basic charts are bar and line
charts. In fact, even if you’re an experienced trader, bar and line charts
probably still have a special place in your daily trading life. These charts
are simply indispensable.
“A picture speaks a thousand words.” This proverb holds just as true for
charts. Charting is the graphical expression of a financial market’s behavior
over a period in time.
Any market has four different trading points throughout one day. They
are: opening price (O), closing price (C), absolute high price of the day
(H), and the absolute low price of the day (L). All of these points appear
on the charts.
The opening price (O) is the first trade of the day. Individual traders tend
to place orders when the market opens, in reaction to the previous day’s
close. This price will normally be based on emotional decisions and
could well indicate how the first half – or the whole day’s trading – is
going to pan out.
The closing price (C) is the last trade of the day. It is generally institutional
investors that place orders towards the day’s close. Unlike the
opening price, the closing price will normally be representative of decisions
made by reason and research – not gut feel.
The day’s low (L) and the day’s high (H) are pretty self-explanatory. The
difference between the high and low on the charts is referred to as the
Range.
The fifth variable displayed on a chart is typically the volume (V), specifying
the number of shares, lots, or contracts traded during the time period
between the open of the market and the close.
Purely looking at these five points on the charts will not be enough to
plan future trades. You need to look at them over a series of time in order
to evaluate trends in the market.
Day traders use trading charts to watch the markets that they trade, and
decide when to make their trades. There are several different types of
trading charts, but they all show essentially the same trading information,
such as the past and current prices.
Bar Charts
A bar chart, also known as a bar graph, is a chart with rectangular bars
whose lengths are proportional to the value they represent. Bar charts are
used for comparing two or more values.
The bar chart is one of the most common charting methods. A bar chart
indicates a single bar that extends from the high to the low of the trading
period it is meant to depict. In addition, the opening and closing price
levels could be displayed as small branches coming away from the main
bar at the appropriate level. Closing prices are put on the right side of the
bar. Opening prices are put on the left side.
Candlestick Charts
You can use candlestick charts as you would use the common
bar chart, and you can combine them with traditional market indicators.
Candlestick charts are a great way to spot opportunities,
filter, and time trades with other indicators.
Because of the way candlestick charts are viewed, they can give
you visual warnings of market reversals much more clearly than
traditional bar charts. If you look at candlestick charting, the
human psychology of the move literally jumps out of the page at
you.
Candlestick charts use the same open, high, low, and close data
that traditional bar charts use, and are easy to draw. The different
candle names are also easy to remember.
The way the candlestick chart is drawn not only gives the direction
of price, but also the momentum behind the move.
Line Charts
A simple line chart draws a line from one closing price to the next closing
price. Line charts show the general price movement over a period of
time. Some investors and traders consider the closing level to be more
important than the open, high, or low. By paying attention to only the
close, intraday swings can be ignored.
Line charts are also used when open, high, and low data points are not
available. Sometimes only the closing data is available for certain indices,
thinly traded stocks, and intraday prices.
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