The chart is used to display the dynamics of price changes of financial instruments. Charts for technical analysis are plotted in two coordinates – price (usually plotted on the vertical axis) and time (usually plotted on the horizontal axis).
In order to build charts (except tick charts), the following set of data is usually used:
– Period’s opening price (OPEN) – the market price that was formed at the beginning of the trading period;
– Period closing price (CLOSE) – market price which was formed at the end of the trade period;
– HIGH – the highest market price of the period;
– Minimum price of the period (LOW) – the lowest price of the market for the period.
As the time scale of price charts it is accepted to use the following trade periods:
- 1 minute (1m)
- 5 minutes (5m)
- 15 minutes (15m)
- 30 minutes (30m)
- 1 hour (1h)
- 4 hours (4h)
- 12 hours (12h)
- day (D)
- 3 days (3D)
- week (W)
- month (M)
We can see an example of a bar chart in the following figure:
Each bar on the chart looks like this:
If the left line is below the right line it means that the price at the beginning of the period was lower than at the end, or we can say that the market price was rising. If the left line is higher than the right one, it means that the price is falling.
The disadvantage of this method is: although the bar chart allows us to explore the range of price changes within a period, it is not very convenient for visual perception.
The chart of Japanese candlesticks looks as follows:
The Japanese candlestick chart is very similar to the bar chart, but according to many users, it is the most convenient for visual perception. Like the bar chart, it is also plotted on high, open, close, and low prices.
The distance between the open and close prices forms a rectangle – the candlestick’s jittai (body), which is shaded depending on the ratio of open and close prices. Usually the following rule is used: if the open price is higher than the close price (i.e., the price fell during the analyzed trading period), the candlestick body is painted in dark color, but if the open price is lower than the close price (the price went up during the analyzed trading period), the candlestick body is not tinted.
The distance between the maximum price of the period and the candlestick body is represented in the form of a vertical line, which is called the upper shadow of the candlestick (uwakage). The distance between the minimum price of the period and the candlestick body is also drawn as a line and called the lower shadow of the candlestick (shitakage).
The closing price (CLOSE) is often used to build a line chart.
This chart has a number of significant disadvantages. As an example, on a line chart it is impossible to even approximately evaluate what is happening within a trading period (whether prices were significantly falling and rising within the period analyzed by the trader, what was the ratio between the closing price and the trading price range). Another disadvantage of usually a line chart is the impossibility to observe the price gaps between the trading periods, although they occur quite rarely.
The advantage of the line chart, however, is that it is convenient for beginners to use it to find the figures of technical analysis.