Study on Types of Technical Charts
Technical analysis is based upon chart reading to identify the short term opportunities based upon the stock price action. There are different charts available:
- Line Chart
- OHLC Chart
- Candle stick chart
A stock is traded on different prices on each day and generates four important prices: open, high,low and close. Based upon this information, these charts are created. Let us understand with the help of an example of Ashok Leyland ltd stock information to make it clear.
The data reveals that each day, a stock experiences the opening price, highest price, lowest price and closing price. A technical analyst tries to create a chart based upon this information to identify the trading pattern.
Types of Technical Charts
1. Line Chart
Line chart is based only upon the closing price of a stock on each day. It is plotted by joining the closing prices that stock experiences on any trading day. This chart is useful to identify the direction of the stock. Lets Understand with the help of an example.
Based upon this information, all closing points are connected to form a line chart. Have a look on line chart:
The disadvantage of line chart is its simplicity. As the chart is created only using closing prices and ignoring all other prices (opening, High and Low). So with this limitation, line chart is only used to identify the direction of the stock. Here the direction of Ashok Leyland is downward. And by using line chart, no short term opportunities are identified. Other charts are better than line chart because they reveal all four prices in a day.
2. OHLC Chart
The OHLC chart full form is Open, High, Low and Close chart is a western style technical chart. The important piece of information is four prices revealed by the chart each day. Have a look on a given diagram.
Each day the stock experiences the four prices. The OHLC chart reveals all this information. In the above diagram, you are seeing different colors of the bar (green/red). Green bar means that the day is positive or bullish, as close is greater than the opening price. Red bar means that the day is negative or bearish, as opening price is greater than the closing price. Have a look on the diagram.
Lets construct the OHLC chart for Ashok Leyland ltd. based upon above data.
No doubt, the OHLC chart is better than line chart but it lacks on visualization. The candle stick chart reveals the same data in better visualize manner and most of the traders use the Japenese candlestick chart to identify short term trades.
3. Candle Stick Chart
The most important chart that technical analyst use is candle Stick chart. The chart also reveal all the important information like open, high, low and close. Have a look on each candle:
Each candle is colored with either green or red. Green candle means that the day is positive or bullish, as closing price is greater than opening price. Red candle reveals that the day is negative or bearish, as opening price is greater than closing price. Have a look on the example:
Lets construct the candle stick chart for Ashok Leyland ltd based upon above data.
You can clearly see that candle stick chart score better than OHLC chart. Japanese candle stick chart has given name to each candle. That we will explore over the period of time in this course. These candles help in identifying the short terms trading opportunities.
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In case, you have not read the “Introduction to technical analysis” click on the link.
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