A price chart is a sequence of prices plotted over a specific time frame. On the chart, the vertical axis represents the price scale while the horizontal axis represents time.
- Time frameEach bar, candlestick or dot in a chart contains information regarding a defined time interval. The length of this interval is the chart interval.
Deciding on which chart interval to use depends on your trading style and investment horizon. Day traders may use chart intervals as short as 1 minute, while swingers (traders that hold trades between several days to a couple of weeks) usually use intervals varying from several hours to a day.
- Price ScaleThere are two methods for displaying the price scale along the y-axis: arithmetic and logarithmic.
On an arithmetic price scale, each price point is separated by the same vertical distance no matter what the price level. Each unit of measure is the same throughout the entire scale. If a stock advances from 10 to 100 over a 6-month period, the move from 10 to 20 (+100% variation) will appear to be the same distance as the move from 90 to 100 (+11% variation). Even though this move is the same in absolute terms, it is not the same in percentage terms.
On a logarithmic scale, each price point is separated by a vertical distance that is equal in percentage terms. An advance from 10 to 20 would represent an increase of 100%. An advance from 20 to 40 would also be 100%, as would an advance from 40 to 80. All three of these advances would appear as the same vertical distance on a logarithmic scale.
Type of Charts
There are three main types of charts that are used by traders depending on the information that they are seeking and their individual skill levels. The chart types are: the line chart, the bar chart and the candlestick chart.
- Line Chart
INTERPRETATION: The line chart is the most basic type of chart. The line shown in the chart connects single prices over a selected period of time. The most popular line chart is the daily chart. Although any point in the day could be plotted, most traders focus on the closing price, which they consider the most important. However this presents an immediate problem; using a daily line chart, one cannot see the price activity that occurred during the rest of the day.
BENEFIT: A line chart gives the trader a fairly good idea of where the price of an asset has traveled over a given time frame.
- Bar Chart
INTERPRETATION: Each vertical bar represents one period of price activity from the chosen periodicity, which could be as short as 1 minute for intraday charts, or as long as several years for historical charts. On a daily chart, the vertical bar represents one day’s trading whereby:
+ the top of the bar represents the market’s high price
+ the bottom of the bar represents the low
+ the left hash mark on the bar indicates the opening price
+ the right hash mark on the bar indicates the closing price
BENEFIT: By including open, high, low and close information, bar charts allow more detailed analysis than standard line charts.
- Candlestick Chart
INTERPRETATION: The candlestick chart is closely related to the bar chart, as it also represents the four major prices: high, low, open, and close. Each candle represents a timescale of your choice. The following timescales are offered by different chart software: 1 min, 15 min, 30 min, 1 hour, 2 hour, 4 hour, 8 hour, daily, weekly and monthly.
For a daily chart, each candlestick represents one day’s trading range and is displayed as „open” or „closed”:
+ An open candlestick represents a higher close than open and is shown in blue.
+ A closed candlestick represents a lower close than open and is shown in red.
Each candlestick consists of two components, the real body and the shadows:
+ The real body is the thick part of the candlestick that represents the open and the close
+ The thin lines above and below the real body are the shadows that represent the session’s price extremes. The upper shadow (above the real body) measures the high of the session and the lower shadow (below the real body) measures the low of the session.
BENEFIT: The candlestick chart is the most common chart used for technical analysis. Many trading strategies are based upon patterns in candlestick charting.