Charts are two-dimensional representation of price over time. There are many types of charts available. But most popular and widely used among them are Line Charts, Bar Charts and the Candlestick Charts. The X axis,
i.e. the time axis is crucial.
The unit can be month, week, day, hour, 5 min or few seconds. The shorter the time period, more detailed the chart becomes. The beauty of time in technical analysis is that the same concepts apply to charts irrespective of time-frame of observation.
However, the success rate of individual patterns or indicators-based decisions may vary across time frames. Generally higher the time frame of chart, relatively higher is the probability of any concept in market.
1.1: Line Charts:
In line chart each and every price point is represented as a dot. The X axis represents the time scale and the Y axis represents the price. Each dot or point represents the closing price at the end of a unit of time.
These points are then joined to form a line. This is the simplest form of chart. But this is quite good if we want to plot 3-4 similarly priced stocks in a single chart and compare.
Moreover, the line chart gives the clearest idea about price direction of a stock.
1.2: Bar Charts:
A bar chart is comprised of a series of bars. Every bar has four important price points – open close high and low. The bars are represented in green or blue color when close is higher than open and red color when close is lower than open. The bar charts are more detailed than the line chart and are good for demonstrating or spotting the classical price patterns. We will discuss about the classical chart patterns in appropriate time.
1.3: Candlestick Chart:
The concept of candlestick charts came from Japan. That is why they are often referred to as Japanese candlestick charts. These charts are the most versatile and popular form of chart representation. Price behavior during each time unit is represented in the form of a candle. If the closing price of a stock is higher than open price during a particular time period, then the candle is green, if the close price is below the open price then the candle is red. Each candle has a body and two wicks. The distance between open to close is represented by the body of a candle and the upper and lower wicks represent the highs and lows of a candle.
Candlestick chart is special not only because it adds a special visual clarity about the price action, but also because often a single candle stick or two or three consecutive candlesticks together form a pattern that indicate reversal of a prior move or give conviction on continuation of the ongoing move. These are called candlestick patterns.