Ways of charting the markets

Technical analysis uses charts as a major tool for forecasting price movements

Where is the stock price, crude oil or the rupee headed? This is a common question asked by financial market players. Technical analysis is a method that studies the price action in the market in order to forecast future price movement. This method primarily uses charts as a major tool for forecasting the prices.

Three major types of charts that are widely used in the financial markets are bar charts, line charts and candlestick charts. Apart from these, point and figure, ichimoku, etc, are other types of charts available. In this column, we will take two examples — a positive day and a negative day — and see how to construct and read the bar, line and candlestick charts for the same.

A positive day is one in which the close price is higher than the open price. A negative day is where the close price is lesser than the open price.

Consider a Stock ‘X’. Say, it opened on a particular trading day at ₹180, made a high of ₹187 and a low of ₹176 during the day, and closed at ₹184 — a positive day. Similarly, consider another trading day in which ‘X’ opened at ₹180, made the same high and low of ₹187 and ₹176 as in the previous example, but closed at ₹178 — a negative day.

Bar chart

As the name suggests, this chart is constructed with a combination of vertical and horizontal bars. The price movement during the day — the range between the low and the high of the day — is represented by a vertical bar. So, the top of the bar is the high made during the day — ₹187 in our example. The bottom point represents the low of the day — ₹176.

The open and close prices are represented as horizontal bars. The open price bar is marked to the left of the vertical bar and the close price on the right side. So, the open bar will be on the upper side of the vertical bar on a positive day and on the lower side on a negative day. See the picture which represents the examples of the price movement on the two different days.

Likewise, the historical daily price movements are marked as a series of bars and used for forecasting.

Line chart

A simple way of representing the price movement is a line chart. As the name represents, this is plotted as a line on the chart. Here, only the closing price of the day is taken into account. The open, high and low prices of the day are ignored. The reason is that closing price is considered the most important and critical value for trading.

The path of the line chart plotted by taking the close price for a specific period of time is studied to understand the trend and also forecast future price movement.

Candlestick chart

The Japanese version of a bar chart is the candlestick chart. Similar to the bar chart, the candlestick also captures all the four key price levels of the day — open, high, low and close. Plotting of the price levels of the day is similar to that of a bar chart — a vertical bar will represent the day’s range between the high and the low. Unlike a bar chart where the open and close prices are marked as vertical bars, here, in candlesticks, the region between the open and close of the day is represented as a rectangular box called the body. The vertical lines above and below the body are called wicks, or hairs, or shadows.

The shade of the body is used to represent whether it is a positive or a negative day. For a positive day, the body is left blank or white. The body is made dark or shaded in black to show a negative day. Analysts also use their own colour variants to mark a positive and a negative day. For example, green shades are used for a positive day and red for a negative day.

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