Recognizing that the Open (O), high (H), low (L), and close (C) are the most effective ways to summarize trading activity for a given period, we need charting methods which show this information clearly.
Charting can also become complicated. Each day has four pieces of data – the OHLC – so tracking ten days would be forty individual points (1-day x 4 data points per day). To get an accurate picture over longer periods like six months or a year, it is essential to have efficient methods for representing the data.
The usual charts – column, pie, area etc. – are unsuitable for technical analysis; the lone exception being the line chart.
Regular charts are inadequate for Technical Analysis, as they only show one data point at a given moment. In contrast, Technical Analysis necessitates the simultaneous display of four data points.
Given below are several kinds of graphs.
A line chart is a type of graph that shows information as a series of data points connected by straight lines. It is used to display the evolution of one or more variables over time. Line charts can help track changes and trends in data over intervals of time, such as days, weeks, months, quarters, or years.
A bar chart is a graphical representation of data. It is made up of rectangular bars, with the length of each bar being proportional to the value it represents. Bar charts are used for a variety of purposes in data analysis, including comparison and visualisation.
Japanese Candlestick Charts are one of the most popular tools used by technical traders. They are known for their visual appeal and simple construction. The ability to quickly and easily identify patterns in the chart makes them popular among those looking to identify trends or trading opportunities in the markets.
This module centres around Japanese Candlesticks, so before delving into the specifics, we will first explain why line and bar charts aren’t used.
The line chart is the most fundamental type of chart, taking one data point to form it. In terms of technical analysis, this chart consists of a stock’s closing prices or an index represented by dots and connected with a line.
If we examine the 60 days, then a line chart emerges by linking the day’s end values.
Line charts can be used to map closing prices over different intervals, such as monthly, weekly or even hourly. If you want to make a weekly chart, closing prices of securities and other time frames.
The line chart is appreciated for its straightforwardness, allowing the trader to quickly assess the general direction of a security. Nonetheless, this lack of detail makes it unreliable since it uses only closing prices without taking into account the open, high and low values. As such, traders tend to avoid this type of chart.
The bar chart is more flexible, showing all of four prices: open, high, low and close. The individual bar comprises three elements.
– The top of the central line shows the highest value that the security has achieved while its bottom indicates the least amount it was traded for during that period.
– The right mark/tick – indicates the close.
– The correct mark/tick signifies the completion.
For example, assume the OHLC data for a stock as follows:
Open – 65
High – 70
Low – 60
Close – 68
For the above data, the bar chart would look like this:
As you can see, in a single bar, we can plot four different price points. If you wish to view a 5 days chart, we will have 5 vertical bars as you would imagine. So on and so forth.
The left and right boundaries of the bar chart shift depending on the fluctuations in the market for that day.
If the left mark is lower than the right, it implies the close was higher than the open (close > open), thus making it a positive day for the financial markets. As an example, if O = 46, H = 51, L = 45, C = 49 then this is typically represented by a blue bar as it signifies a bullish day.
If the left mark is greater than the right mark, it indicates that the close is less than the open (close <open), signifying a bearish day for markets. For instance, consider this situation: O = 74, H=76, L=70, C=71. The bar is usually depicted in red colour to further illustrate that it is an adverse market.
The central line’s length reflects the day’s range, which is the difference between the high and low. The greater the line’s length, the bigger the range; similarly, a shorter line indicates a smaller range.
A bar chart lacks visual appeal and makes it difficult to identify patterns. Even when only looking at a single chart, it can be challenging to spot potential tendencies while analysing multiple charts throughout the day is an even greater issue.
Therefore, those beginning in trading are advised to use Japanese Candlesticks as the default choice from the majority of the trading community. Bar charts are not used by many traders, however some that do exist prefer to use this technique.