There are four primary types of charts used by traders depending on the type of information. These chart types include line charts, bar charts, candlestick charts, and point and figure charts.
Line charts are the most basic type of chart and represent only the closing prices over a set period. The line is formed by connecting the closing prices for each period over the timeframe.
This type of chart doesn’t provide much insight into intraday price movements. Traders consider closing price to be of fundamental importance. Line chart makes it easier to spot trends since there’s less ‘noise’ happening compared to other chart types.
Candlestick charts originated in Japan and is extremely popular among traders and investors. Like a bar chart, candlestick charts have a thin vertical line showing the price range for a given period that’s shaded different colors based on whether the stock ended higher or lower. The difference is a wider bar or rectangle that represents the difference between the opening and closing prices.
Falling periods will typically have a red or black candlestick body, while rising periods will have a white or green candlestick body.
Point and Figure Charts
Point and figure charts are not very well known. The chart reflects price movements without time or volume concerns, which helps remove noise – or insignificant price movements – that can distort a trader’s view of the overall trend.
Point and figure charts are characterized by a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. Each box on the chart represents the price scale, which adjusts depending on the price of the stock:
Point and figure charts have reversal criteria. It represents how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signaling a trend change.
Charts are the most fundamental aspect of technical analysis. Finally, It’s important for traders to understand what’s being shown on a chart and the information it provides.