Chart Analysis
Chart analysis involves a price chart and is a sequence of prices plotted over a specific timeframe. In statistical terms, charts are referred to as time series plots. On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being furthest to the right.
Technicians, technical analysts and chartists use charts to analyze a wide array of securities and forecast future price movements. The word "securities" refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, currencies, futures or market indices. Any instrument with price data over a period of time can be used to form a chart for analysis.
Chart Types
We will be explaining the construction of line, bar, candlestick and point & figure charts. Although there are other methods available, these are four of the most popular methods for displaying price data.
Line chart:
The line chart is one of the simplest charts. It is formed by plotting one price point, usually the closing price of a security over a period of time. Connecting the dots or price points over a period of time creates the line.
Some investors and traders consider the closing level to be more important than the open, high or low levels. By paying attention to only the closing price, intraday swings can be ignored. Line charts are also used when open; high and low data points are not available.
Bar Chart:
Perhaps the most popular charting method is the bar chart. The high, low and close values are required to form the price plot for each period of a bar chart. The high and low are represented by the top and bottom of the vertical bar and the close is the short horizontal line crossing the vertical bar. On a daily chart, each bar represents the high, low and close for a particular day. Weekly charts would have a bar for each week based on Friday's close and the high and low for that week.
Candle Stick Chart
Originating in Japan over 300 years ago, candlestick charts have become quite popular in recent years. For a candlestick chart, the open, high, low and close values are all required. A daily candlestick is based on the open price, the intraday high and low, and the closing price. A weekly candlestick is based on Monday's open, the weekly high-low range and Friday's close.
Many traders and investors believe that candlestick charts are easy to read, especially the relationship between the open and the close values. White (clear) candlesticks form when the close is higher than the open and black (solid) candlesticks form when the close is lower than the open. The white and black portion formed from the open and close values is called the body (white body or black body). The lines above and below are called shadows and represent the high and low.
Point and Figure Chart:
The charting methods show all plot in one data point for each period of time. No matter how much prices move, each day or week is represented by one point, bar or candlestick along the time scale. Even if the price is unchanged from day to day or week to week, a dot, bar or candlestick is plotted to mark the price action. Contrary to this methodology, Point and Figure Charts are based solely on price movements and do not take time into consideration. There is an x-axis, but it does not extend evenly across the chart. Little or no price movement is deemed irrelevant and therefore not duplicated on the chart. Only price movements that exceed specified levels are recorded. This focus on price movements makes it easier to identify support and resistance levels, bullish breakouts and bearish breakdowns.