June 30, 2021 | by sandeep
Bar Charts, Candlesticks & Price Action
The Bar Chart, which is also known as the OHLC Chart, gives you four pieces of information: the Open, Close, High and Low price during a particular period. This is opposed to the line chart, which only offers you the closing price.
In the image above, it’s important to know that the long vertical line represents the price movement during that specific period with its top and bottom edges of the line being the highest and lowest prices. The open and close prices are represented by the small dashes on the bar.
The bar chart above shows a series of Open, Close, High and Low prices, as labeled by the blue and white boxes.
If you look at the shaded areas above, these are your support and resistance levels. Those prices that spike above or below the shaded areas on the bar chart are not shown on the line chart because, on the latter, only open and close prices are available. Line charts won’t take into account price movement going all the way to both the highs and lows. Due to this, you will see slight differences in the bar chart, even though you’re looking at the same exact data.
Remember, the line chart doesn’t show us the highest price, as shaded in yellow in the image above. It only shows us the close price as represented in the bar chart by the horizontal marker on the longer vertical line.
A trader or technical analyst will look at a bar chart and try to identify the trend or the direction of the market. In other words, whether it is going up, down or sideways. So how do you decide if there’s an uptrend or a downtrend?
Simply speaking, an Uptrend is a series of Higher Highs (HH) and Higher Lows (HL), while a Downtrend is a series of Lower Highs (LH) and Lower Lows (LL). This is also called Price Action.
You can use price action to identify and mark a series of immediate Higher Highs, Higher Lows, Lower Highs and Lower Lows.
To identify an uptrend, the price must rise above the current high, establishing a new high. Looking at the chart above, it is clear that after a series of lows and higher lows, prices clearly rose above the previous high establishing a new higher high. This is when you know that the price has confirmed an uptrend.
If you are among the few considering selling due to some event or market news, this would certainly not be something you would want to see as price is now clearly reaching a new higher high. It is something that, as a bear, you would be very upset to see.
You might think the price has reached its support level, hitting this level and repeating itself as it did with the previous high. Instead, when it met that point, it did the unexpected and broke the previous high to establish a new high and confirm an uptrend.
Sometimes people just want to quickly tick the box and go into a trade without waiting for the pattern to finish and confirm the trend. It is very important that you wait for the price to complete to confirm the direction you need to take to benefit from your trade entry.
Unfortunately, the price doesn’t always go in the direction you want. In this case, the price has now reached a higher low without breaking the previous high. So, you’ve got a higher low compared to the previous low. You expected a higher high to the previous high because it’s still a bullish market. But now the price has set a lower low.
Immediately, alarm bells should be going off in your head. If you’re a bull, that’s not what you wanted to see. You need to start asking yourself whether or not the market is still in an uptrend. Well, the market is not in an uptrend anymore, therefore it might be good to consider selling. Obviously, the bulls have lost confidence and maybe are taking their profits or that was a target that was reached. Either way, if you are a bear, you will now need a lower low so you can begin trading to the downside.
Understanding Japanese Candlesticks
Like the bar chart, the Japanese Candlestick Chart has the same information but in a visually different way.
It also includes the same four pieces of information: Open, Close, High and Low. The body of the candle represents the open and close price. It also includes the highest and lowest the price has moved during that specific period of time. The line, which is an extension of the body and marks the high and low price, is called a Wick.
If the candle is a bull candle or in a bull market, then the open price is lower than the closing price. On the other hand, if the candle is a bear candle or in the bear market, then the open price is always higher than the closing price. Usually, traders paint the candle in different colors with each representing either a bull or a bear candle. The most common colors used are green or blue for a bull candle and red for a bear candle.
How do you use these candlestick charts and how do they differ from a bar chart?
Here are the same data points plotted for the bar chart but now shown as candlesticks.
So what do we have?
We have a low, a higher high, a higher low and a higher high. You understand from price action that the market is in a bullish trend, just as you recognized from the bar chart.
After this higher low shown above, what would you expect? A higher high. But again, you can see on the candlestick chart, just as you did on the bar chart, that you’ve got a problem. A higher high hasn’t been reached. Alarm bells go off: What is going on here? What happened to the uptrend? Maybe it’s time to take profits.
Both bar charts and candlestick charts give you more information than the basic line chart. They are not as clear but once you get used to it it’s clean and easy to read.
Let’s have a quick look at a few other charts to give you a good, all-around understanding of the different types that are available to traders.
Point & Figure Charts Explained
Here’s a Point & Figure Chart, one that’s not often used by many traders.
This chart has a really long history going back to the very beginning of technical analysis. The point & figure chart is only concerned with price. It doesn’t care about how long it took the price to move in a certain direction or trade volume. It’s just going to look at price movement, dismissing anything in between a trend like, say, sideways action.
In the image above, you see a lot of Xs and 0s stacked up on top of each other. What do they mean?
The Xs represent bullish price action, while the 0s represent bearish price trends. You will always notice that the amount of Xs or 0s depends on which way the market has been moving. On the X-axis, you will also see some letters, which represent the months, in this case, September, October and November.
An important point about these charts is that they are trying to identify reversals or anticipate ones. What you need to do is look for a series of Xs, generally around three, but you can adjust that number based on your own preference and how strong a trend you are looking for. So you’re looking for, say, three Xs or 0s in a row, and it calculates how much the price needs to move away from the high or the low to create a new trend. In other words, how much this price needs to move before you see that a column of Xs has turned into a column of 0s. So, in this case, each column represents a trend.
Introducing the Three-Line Break Chart
In a Three-Line Break Chart, you’re looking for a rising line. So the closing price is higher than the previous close, that’ll be a rising line. A falling line means the closing price is just lower than the previous low or the previous closing price.
Kagi Chart Deciphered
The final chart is the Kagi Chart, another Japanese creation going back to the 1800s, which uses a series of vertical lines that, depending on their thickness, tell you whether the trend is bullish or bearish.
Here you will notice how certain areas are highlighted as thicker or thinner. This simply shows that prices have broken above a previous high and gone from a thick green line to a red line. Similarly, if the price breaks a low and sets a high, then the Kagi will move from a thick red line to a green line.
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