Types of Technical Charts in Trading

எத்தனை வகையான சார்ட்ஸ் உள்ளது வீடியோ தமிழில்





3.1– Overview

Having recognized that the Open (O), high (H), low (L), and close (C) serves as the best way to summarize the trading action for the given time period, we need a charting technique that displays this information in the most comprehensible way. If not for a good charting technique, charts can get quite complex. Each trading day has four data points’ i.e the OHLC. If we are looking at a 10 day chart, we need to visualize 40 data points (1 day x 4 data points per day). So you can imagine how complex it would be to visualize 6 months or a year’s data.

As you may have guessed, the regular charts that we are generally used to – like the column chart, pie chart, area chart etc does not work for technical analysis. The only exception to this is the line chart.

The regular charts don’t work mainly because they display one data point at a given point in time. However Technical Analysis requires four data points to be displayed at the same time.

Below are some of the chart types:

Line chartBar ChartJapanese Candlestick

The focus of this module will be on the Japanese Candlesticks however before we get to candlesticks, we will understand why we don’t use the line and bar chart.

3.2 – The Line and Bar chart

The line chart is the most basic chart type and it uses only one data point to form the chart. When it comes to technical analysis, a line chart is formed by plotting the closing prices of a stock or an index. A dot is placed for each closing price and the various dots are then connected by a line.

If we are looking 60 day data then the line chart is formed by connecting the dots of the closing prices for 60 days.

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The line charts can be plotted for various time frames namely monthly, weekly, hourly etc. So ,if you wish to draw a weekly line chart, you can use weekly closing prices of securities and likewise for the other time frames as well.

The advantage of the line chart is its simplicity. With one glance, the trader can identify the generic trend of the security. However the disadvantage of the line chart is also its simplicity. Besides giving the analysts a view on the trend, the line chart does not provide any additional detail. Plus the line chart takes into consideration only the closing prices ignoring the open, high and low. For this reason traders prefer not to use the line charts.

The bar chart on the other hand is a bit more versatile. A bar chart displays all the four price variables namely open, high, low, and close. A bar has three components.

The central line – The top of the bar indicates the highest price the security has reached. The bottom end of the bar indicates the lowest price for the same period.The left mark/tick – indicates the openThe right mark/tick – indicates the close

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:

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As you can see, in a single bar, we can plot four different price points. If you wish to view 5 days chart, as you would imagine we will have 5 vertical bars. So on and so forth.

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Note the position of the left and right mark on the bar chart varies based on how the market has moved for the given day.

If the left mark, which represents the opening price is placed lower than the right mark, it indicates that the close is higher than the open (close > open), hence a positive day for the markets. For example consider this: O = 46, H = 51, L = 45, C = 49. To indicate it is a bullish day, the bar is represented in blue color.

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Likewise if the left mark is placed higher than the right mark it indicates that the close is lower than the open (close <open), hence a negative day for markets. For example consider this: O = 74, H=76, L=70, C=71. To indicate it is a bearish day, the bar is represented in red color.

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The length of the central line indicates the range for the day. A range can be defined as the difference between the high and low. Longer the line, bigger the range, shorter the line, smaller is the range.

While the bar chart displays all the four data points it still lacks a visual appeal. This is probably the biggest disadvantage of a bar chart. It becomes really hard to spot potential patterns brewing when one is looking at a bar chart. The complexity increases when a trader has to analyze multiple charts during the day.

Hence for this reason the traders do not use bar charts. However it is worth mentioning that there are traders who prefer to use bar charts. But if you are starting fresh, I would strongly recommend the use of Japanese Candlesticks. Candlesticks are the default option for the majority in the trading community.

3.3 – History of the Japanese Candlestick

Before we jump in, it is worth spending time to understand in brief the history of the Japanese Candlesticks. As the name suggests, the candlesticks originated from Japan. The earliest use of candlesticks dates back to the 18th century by a Japanese rice merchant named Homma Munehisa.

Though the candlesticks have been in existence for a long time in Japan, and are probably the oldest form of price analysis, the western world traders were clueless about it. It is believed that sometime around 1980’s a trader named Steve Nison accidentally discovered candlesticks, and he actually introduced the methodology to the rest of the world. He authored the first ever book on candlesticks titled “Japanese Candlestick Charting Techniques” which is still a favorite amongst many traders.

Most of the pattern in candlesticks still retains the Japanese names; thus giving an oriental feel to technical analysis.

3.4 – Candlestick Anatomy

While in a bar chart the open and the close prices are shown by a tick on the left and the right sides of the bar respectively, however in a candlestick the open and close prices are displayed by a rectangular body.

In a candle stick chart, candles can be classified as a bullish or bearish candle usually represented by blue/green/white and red/black candles respectively. Needless to say, the colors can be customized to any color of your choice; the technical analysis software allows you to do this. In this module we have opted for the blue and red combination to represent bullish and bearish candles respectively.

Let us look at the bullish candle. The candlestick, like a bar chart is made of 3 components.

The Central real body – The real body, rectangular in shape connects the opening and closing priceUpper shadow – Connects the high point to the closeLower Shadow – Connects the low point to the open

Have a look at the image below to understand how a bullish candlestick is formed:

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This is best understood with an example. Let us assume the prices as follows..

Open = 62 High = 70 Low = 58 Close = 67

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Likewise, the bearish candle also has 3 components:

The Central real body – The real body, rectangular in shape which connects the opening and closing price. However the opening is at the top end and the closing is at the bottom end of the rectangleUpper shadow – Connects the high point to the openLower Shadow – Connects the Low point to the close

This is how a bearish candle would look like:

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This is best understood with an example. Let us assume the prices as follows..

Open = 456 High = 470 Low = 420 Close = 435

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Here is a little exercise to help you understand the candlestick pattern better. Try and plot the candlesticks for the given data.

DayOpenHighLowCloseDay 1430444425438Day 2445455438450Day 3445455430437

If you find any difficulty in doing this exercise, feel free to ask your query in the comments at the end of this chapter.

Once you internalize the way candlesticks are plotted, reading the candlesticks to identify patterns becomes a lot easier.

This is how the candlestick chart looks like if you were to plot them on a time series. The blue candle indicates bullishness and red indicates bearishness.

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Also note, a long bodied candle depicts strong buying or selling activity. A short bodied candle depicts less trading activity and hence less price movement.

To sum up, candlesticks are easier to interpret in comparison to the bar chart. Candlesticks help you to quickly visualize the relationship between the open and close as well as the high and low price points.

3.5 – A note on time frames

A time frame is defined as the time duration during which one chooses to study a particular chart. Some of the popular time frames that technical analysts use are:

Monthly ChartsWeekly chartsDaily or End of day chartsIntraday charts – 30 Mins, 15 mins and 5 minutes

One can customize the time frame as per their requirement. For example a high frequency trader may want to use a 1 minute chart as opposed to any other time frame.

Here is a quick note on different types of time frames.

Time FrameOpenHighLowCloseNo of CandlesMonthlyThe opening price on the first day of the monthHighest price at which the stock traded during the entire monthLowest price at which the stock traded during the entire monthThe closing price on the last day of the month12 candles for the entire yearWeeklyMonday’s Opening PriceHighest price at which the stock traded during the entire weekLowest price at which the stock traded during the entire weekThe closing price on Friday52 candles for the entire yearDaily or EODOpening price of the dayHighest price at which the stock traded during the dayLowest price at which the stock traded during the entire dayThe closing price of the dayOne candle per day, 252 candles for the entire yearIntraday 30 minutesThe opening price at the beginning of the 1st minuteHighest price at which the stock traded during the 30 minute durationLowest price at which the stock traded during the 30 minute durationThe closing price as on the 30th minuteApproximately 12 candles per dayIntraday 15 minutesThe opening price at the beginning of the 1st minuteHighest price at which the stock traded during the 15 minute durationLowest price at which the stock traded during the 15 minute durationThe closing price as on the 15th minute25 candles per dayIntraday 5 minutesThe opening price at the beginning of the 1st minuteHighest price at which the stock traded during the 5 minute durationLowest price at which the stock traded during the 5 minute durationThe closing price as on the 5th minute75 candles per day

As you can see from the table above as and when the time frame reduces, the number of candles (data points) increase. Based on the type of trader you are, you need to take a stand on the time frame you need.

The data can either be information or noise. As a trader, you need to filter information from noise. For instance a long term investor is better off looking at weekly or monthly charts as this would provide information. While on the other hand an intraday trader executing 1 or 2 trades per day is better off looking at end of day (EOD) or at best 15 mins charts. Likewise for a high frequency trader, a 1 minute charts can convey a lot of information.

So based on your stance as a trader you need to choose a time frame. This is extremely crucial for your trading success, because a successful trader looks for information and discards the noise.


More Commonly used Types of Technical Charts in Trading


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Renko Charts

Area Charts

Baseline Charts

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