10.4 Charts
Chart patterns
As discussed earlier, technical analysts prepare charts and graphs of various market statistics to forecast stock prices and the market. That's the reason technical analysts are also called chartists. So the foundation of technical analysis is analysis of the chart. In this case, a picture truly is worth a thousand words. So let’s us discuss about a few charts as under:
Line charts:
A line chart is the simplest type of chart. As shown in the chart of General Motors in Figure 2, the single line represents the closing price on each day. Dates are displayed along the bottom of the chart and prices are displayed on the side(s). A line chart’s strength comes from its simplicity. It provides an uncluttered, easy-to-understand view of a security's price. Line charts are typically displayed using a security's closing prices. It will give you the first glimpse about where the stock market is heading towards.
Bar charts:
A bar chart displays a security's open price, high price, low price and closing prices. Bar charts are the most popular types of security charts. As illustrated in the bar chart below, the top of each vertical bar represents the highest price that the security traded during the period, and the bottom of the bar represents the lowest price that it traded. A closing 'tick' is displayed on the right side of the bar to designate the last price that the security traded. If opening prices are available, they are signified by a tick on the left side of the bar.
Japanese Candlesticks:
Japanese Candlesticks are another chart type that provides unique visual cues that make reading price action easier. Trading with Japanese Candlestick charts allow speculators to better comprehend the market sentiment. Offering a greater depth of information than traditional bar charts - where the high and low are emphasized - candlesticks give emphasis to the relationship between the close and open prices.
Traders who use candlesticks may more quickly identify different types of price action that tend to predict reversals or continuations in trends - one of the most difficult aspects of trading. Furthermore, combined with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points. The body of a candlestick illustrates the difference between the opening and closing price. There are mainly three types of candlesticks viz. white or blue, black or red and the doji or neutral candlestick.
A black or red candlestick is used when the closing price of the day is lower than the opening price. Thus, a white or blue candlestick indicates a bullish trend while a black or red candlestick indicates a bearish trend. A doji candlestick is the one where the opening price and the closing price of the day are the same. Its colour (in this case, red for down and blue for up) shows whether the day's (or week's or year's) market closed up or down. The wicks (or shadows) point out the extreme low and the extreme high price for the stock that day.