If you're just getting started trading stocks, you might wonder what type of chart is the best for technical analysis.
This article will explore the types of charts that are available and which ones you should use in which case.
The most simple kind of stock chart available is the line chart. In charting software, the computer creates a line chart by plotting the closing price from each time-period and then drawing a line connecting them.
A line chart does not provide information about how the price of a stock has moved within a time period. It only tells you what's been happening from one time-period to the next. For example, an hourly line chart will tell how the price moved from one hour to the next but will not tell you how the price moved over the course of a single hour.
Here's a line chart of the Van Eck Vectors Gold Miners ETF.
In most cases, a line chart simply doesn't provide enough information to allow you to trade stocks successfully.
But there may be some cases where you need to see a long-term trend and don't want to be distracted by information you don't need. In this limited case, a line chart may be better than OHLC or candlesticks.
So don't count them out in all circumstances.
OHLC stands for “open, high, low, close”. OHLC charts consist of “bars” that are made of vertical lines with horizontal lines sticking out of them. This is why OHLC charts are also sometimes called “bar charts”.
The vertical line represents how far the stock price traveled from its lowest point to its highest point of the day, whereas the horizontal lines represent what the stock price opened or closed at.
A horizontal line that sticks out of the left side indicates the opening price. A horizontal line that sticks out of the right side indicates the closing price. You can also color the bars so that “up” bars are white or green and “down” bars are black or red if you have trouble remembering which side is which.
Here's a chart of GDX again...but this time it's OHLC.
OHLC charts provide a lot more information than line charts. And many traders are happy to use them for all of their trades. But some traders prefer candlesticks instead.
Candlestick charts are drawn using the same information as OHLC charts. But instead of using vertical and horizontal lines, it uses a rectangle called the “body” and vertical lines called the “wicks”.
Here's a chart of GDX once again...but this time with candlesticks.
If a candlestick has a long body, it means there was a big move in the share price during that particular time-period. If the candle has a short body, it means the price didn't move much between open and close.
If there is a large wick above the body, it means that buyers tried to push the price up but failed. If there is a large wick below the body, it means sellers tried to push the price down but failed.
Candlestick charts are probably the most popular kind of charts. There are hundreds of different patterns that analysts have discovered in them, and many traders say these patterns are easier to spot in candlesticks than in OHLC charts.
However, the two kinds of charts provide the same information. So theoretically, it shouldn't matter which one you use.
So to sum things up, line charts are best used when you want an uncluttered view of long-term price action. For all other cases, either OHLC or candlestick charts should be used based on your personal preference.
I hope this article has been helpful. Please share it with others if you think they may benefit from it.