Prices are important in technical analysis. Let’s get to know the three standard price charts we use in technical analysis.
To draw a price chart, we need to choose a time frame. Then, we need the open, high, low, and close prices of each period.
For the following examples, we are using daily prices.
1. Line price chart
To get a line chart, we plot the closing price of each day and connect them.
Unlike bar charts and candlesticks charts, line charts contain only the closing prices. Without the high, low and open prices, line charts lack the information needed for short-term pattern analysis, especially bar patterns.
Hence, line charts are more often used to analyze long-term trends and chart patterns. (Learn more about chart patterns here.)
2. Bar price chart
A bar chart has price bars, which are colored differently depending on whether the bar closed higher or lower.
A bar chart is also known as OHLC (open-high-low-close) chart. With OHLC, bar charts offer more insights into price action. (What is price action?)
For instance, we can see if the bars are making higher highs. We can also compare the closing price yesterday with the opening price today to see if the price has gapped overnight.
3. Candlestick Price Chart
As the tale goes: in the 18th century, a Japanese rice trader, Munehisa Homma, used candlesticks to trade rice and made an incredible fortune. (We need to thank Steve Nison for bringing candlesticks to the West.)
Essentially, candlesticks have the same information as a price bar (OHLC). The key difference is the colored body of the candlestick which highlights if the bar closed higher or lower.
In that case, why are candlesticks so popular among traders?
I attribute it to the various candlestick patterns that come with candlestick charting. These candlestick patterns are useful for timing entries and exits. Not only that, they have poetic names like “shooting star”, “dark cloud cover”, and “dragonfly doji”.
These three price chart types form the foundation for analyzing charts for trading.
Want to learn more chart types? Click here for an article that covers ten chart types including Renko and volume charts.