CHART
Chart is the technical analysis tool used by traders/investors to analyze the data in a jiffy by providing several relevant information at the set interval time. There are many methods using which a trader can retrieve data required depending on their need. For an intra day trader, there is a need to look into chart at frequent intervals where as for an investor looking into charts just once in a while is fine depending upon how long they are planning to retain it.
There are several general charts like pie chart, column chart etc. which do not work for technical analysis. Reason being, we need four data points i.e Open (O), high (H), low (L) and close ( C) as it serves as the best way to summarize the trading action for the given period, but the general charts do not display this information in the most comprehensible way. Therefore choosing chart type that displays four points at the same time is necessary for technical analysis.
Types of Chart :
1. Line chart
2. Bar chart
3. Japanese Candlestick
The above mentioned chart types are most commonly used.
Why Line chart and Bar chart are not preferred by traders?
Line chart uses only one data point to form the chart which is closing price hence it is considered as the most simplest and basic chart type. The trader can easily identify general trend of a particular stock for for any given time frame.
As you can see in the above image, one can easily identify the general trend of the stock infy very easily. But the disadvantage is its simplicity as it considers only one point which is closing price and therefore it does not provide any other additional information other than general trend. Therefore, it is not preferred by traders.
On the other hand, Bar chart is slightly better than line chart as it displays all the four price variables i.e OHLC as shown in the chart below:
We can observe that there are 3 components in the bar namely:
1. The Central line - Highest price is indicated by the top of the bar and lowest price is indicated by the bottom end of the bar. Length of the central line indicates range for the day.
2. The Left mark - Opening price.
3. The Right mark - Closing price.
Even though four price variables are displayed on the bar chart, still it is not preferred by traders, because of its high complexity as it becomes hard to spot patterns when one is looking at bar chart.
It can be summarized that Chart needs to have all four price variable but it should be also simple enough for traders to easily spot patterns without any high complexity and all these requirements can be met with the help of Japanese Candlestick and it is widely used by traders.
Japanese Candlesticks
As the name suggests, the candlestick originated from Japan. In this candlestick pattern the open and close prices are displayed by a rectangular body.
In a candlestick chart, candles can be classified as a bullish or bearish candle usually represented by blue/green/white and red/black candles but mostly it is represented by green and red candles.
2. Upper shadow connects the high point to the close.
Bearish candle is made of 3 components:
1. Rectangular body connects the opening which is the top end and closing price which is the bottom end.
2. Upper shadow connects the high point to the open.
3. Lower shadow connects the low point to the close.
This is how candlestick pattern looks like in 5 minutes time frame. If candle is long, it represents strong buying or selling activity and less trading activity if the candle is small. Just one glance will give us clear idea and many details required for trade analyst. Depending on the investor/trader needs time frame can be set.
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