InvestorQ : How important is chart watching in technical trading and what re the different charts that I can look at?
Aditi Sharma made post

How important is chart watching in technical trading and what re the different charts that I can look at?

Answer
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Aashna Tripathi answered.
1 year ago


If you want to be a technical chartist or a trader on momentum then you can avoid staring at charts. One of the most basic foundations of technical analysis is watching price charts. There are three popular types of charts that are used by traders; line charts, bar charts, and candlestick charts. Bar charts and candlesticks are conceptually the same with the only difference that the candlestick is visually more appealing and hence easier to interpret when we are looking at an array of stocks.

Let us look at the line chart first. The line chart is the simplest among the three, with a price line connecting one closing price to the next. Remember, the line chart is straight and simple because it only considers the closing price. You can either take the last traded price or the closing price, which is the average of the last 30 minutes of trading, although the closing price is preferred. This allows the trader to gauge the general direction of price action, whether the exchange rate is trending higher or lower. Line charts are good for medium to long term macro trends, not so much for short term trading as it only captures the EOD price and not the intraday price dynamics.

Secondly, we come to the slightly more sophisticated bar chart, which is also called the OHLC chart because it combines the four facets of a stock price during the day viz. (open, high, low and close). The OHLC chart is a little more complex that a simple line chart. This is how it is constructed. Each bar denotes the open, high, low, and close of the price depending on the time frame used. However, the bar chart while giving a more rounded view is not visually appealing and can be problematic when it comes to looking at larger number of stocks in the universe. This is how the bar charts can be interpreted. In each bar, the horizontal line to the left marks the open price for the period while the horizontal line to the right marks the closing price. The highest point of each bar stands for the high for the period while the lowest point is for the low. When it you look at intraday trading, this a lot more useful than a line chart which only captures the closing price.

Lastly, we come to the most popular form which is the Candlestick chart. It is visually appealing and is most commonly used by traders in equities, commodities and also in currencies. Structurally, the candlestick is similar to the Bar chart or the OHLC chart. Like the Bar chart, the candlesticks also indicate the open, high, low, and close of price action during the period. What sets candlesticks apart is their visual appeal. That is because the bars have a coloured body, which makes it easier to visualize whether price went up or down during the period. More so; when the trader is looking at multiple stocks to arrive at the selection! When price closes higher than its open price for the period, the candlestick is coloured white or green. When price closes lower than its open price for the period, the candlestick is coloured black or red. These colours can be customized depending on your visual preferences but the idea is that traders and chartists can get a clearer idea of whether buying or selling pressure is building up. This allows you to calibrate trades in a more efficient and effective manner.