Technical Analysis of the stock market is incomplete without the study of various charts. Traders and investors analyse various charts in technical analysis in an attempt to predict the movements of prices of the securities. And undoubtedly, technical analysis of various charts have helped traders to secure a handsome amount of profit from their assets.
What is Technical Analysis using Charts?
Firstly, Technical Analysis is the study of price movements and patterns of a particular market in order to predict the future of the price of a security.
And charts in the technical analysis help in studying various patterns which can let traders predict how the market price will possibly move in the coming future.
Basically, technical analysis using charts is scrutinizing a security’s past price action to forecast future price direction.
There are numerous charts available in the technical analysis, but the most used and trusted charts for traders are a few that we are going to discuss in this article.
One of the most famous charts in technical analysis used by traders and investors.
Also known as Japanese Candlesticks, this chart is thought to be developed by a Japanese rice trader in the 18th century. But the concept of the candlesticks was introduced to the world by Steve Nison in his book, Japanese Candlestick Charting Techniques.
Munehisa Homma, the Japanese trader believed that while price, supply and demand are correlated, traders’ emotions also influence the market significantly. And candlesticks show this emotional aspect through price movements through different colours.
A typical candlestick can be of two types:
Bullish Candle: When the closing price is higher than the opening price for a particular time period (usually green or white)
Bearish Candle: When the opening price is higher than the closing price for a particular time period (usually red or black)
And each of these candles consists of three parts:
1. Upper Shadow: The vertical line between the high for a particular time period and the close (bullish candle) or open (bearish candle)
2. Real Body: The difference between the open and close i.e. the coloured portion of the candlestick. This also depicts the volume for that particular time period
3. Lower Shadow: The vertical line between the low for a particular time period and the open (bullish candle) or close (bearish candle)
In the list of charts in technical analysis, candlestick remains the most famous charts used by traders to date.
2. Bar Chart
A bar chart also displays open, high, low and close (OHLC) prices of a particular time period. Just like candlesticks, traders use bar charts to analyse price movements to predict the prices of a security.
A bar chart shows horizontal lines to depict open and close prices which are called ticks. The distance between the ticks determines how much the price has moved for the time period.
The high price is shown by the top of the bar and the lower price is shown at the bottom of the bar.
Bars are also shown in different colours just like candlesticks.
3. Line Chart
It is one of the most basic charts in technical analysis of the stock market.
Basically, the line chart is the continuous representation of closing prices of a security for a particular time period. Thus also known as the close-only chart.
In a line chart the price data for a particular security is plotted on a graph with the time plotted from left to right along the horizontal axis, or the x-axis and price levels plotted from the bottom up along the vertical axis, or the y-axis.
Unlike the other two charts, the line chart doesn’t show much detail about a stock, except for the closing prices. But still, it remains the most basic chart used by traders to record the past prices of a security at a glimpse.
Charts in technical analysis play an important for a trader to flourish in the stock market with most profit and least loss.