Candlestick Trading Blog

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Technical analysis charts display a series of prices over a set period of time. Stock charts are used along with chart patterns and these patterns are distinct formations that are used to identify current trends and trend reversals that signify to traders when to buy and sell. The theory behind using patterns and chart formations is based on the assumption history repeats itself. Certain patterns are seen over and over again and these patterns signal the probably move that the stock will take. The patterns on technical analysis charts are then used to identify potential trading opportunities. There are four types of stock charts that we will review today that are available for those investors who practice stock technical analysis.
The first and most basic of these four stockcharts is the line chart. The line chart only displays the closing prices over a specific time frame and it is formed by connecting the closing prices over that time frame. While the closing price is considered to be the most valuable piece of information on technical analysis charts, line charts do not provide a visual depiction of the trading range for the high, low and opening prices, which are very valuable pieces of information needed for day traders as well as other types of traders. 

The bar chart is an expansion of the line chart because it adds more pieces of information in addition to the closing price. The high and low for a trading period is displayed along with the closing price and it this information is represented by a vertical line to represent each data point. When short-term stock trading, using technical analysis charts, the close and the open are represented on the vertical line by a horizontal dash with the opening price located on the left side of the bar, and the close located on the right side of the vertical bar. The bar is shaded black when the when the opening price is lower than the closing price, and the bar is shaded red when the opposite occurs. A black bar indicated an increase in value for the stock, with a red bar representing a decrease in the value of the stock.

Candlestick charts are similar to bar charts but they are more visually appealing and easier to read. The only difference is that there is a formation of a wide bar on the vertical line illustrating the difference between the open and the close. There are two color constructs when candlestick charting. White or clear candlesticks both indicate when the price of the stock is up and closes above the opening trade. Red or black candlesticks indicate that the stock has traded down for a period. There is more to using these technical analysis charts and many investors feel that candlestick patterns give the investors more information regarding market sentiment, unlike any other type of chart.

The last chart we will looking at technical analysis charts is the point and figure chart. This stock chart is not used by the average investor but it has been around for a long time. This chart is not concerned with time and volume in the formation of the data points and it reflects price movements. This chart removes the noise, unlike the line and bar chart, and it attempts to neutralize the skewing effect that time has on chart analysis.

The most important part of learning about stock market technical analysis is learning how to read charts.  Every trader must be very clear on what information is shown on the chart and what that information means. Many investors, however, especially day traders, prefer the using candlestick charts above all other types of charts.