These are different types of charts, such as line charts, bar charts, candlestick charts etc. One by one we will go through the formation of the line chart, bar chart, candlestick chart and point & figure chart.
Type of Charts
A line chart is drawn by plotting only the closing price of the day (Figure 1.1). Most traders and investors believe that the closing price is the most important price of the respective time frame. Line charts are more useful to determine breakout patterns etc. It is not commonly used due to its limitation of data handling.
Figure 1.1 - Line Chart
The bar chart is the most popular charting method wherein all the four price data is plotted on chart i.e. Open Price, High Price, Low Price & Close Price commonly called as OHLC data. The high is represented by the top and bottom of the vertical bar and the close is the short horizontal line crossing the vertical bar. (Refer to figure 1.2). The close is always on the left side of the bar and the open is on the right side of the bar. The daily bar chart represents the day high, day low and the day close of that particular day likewise weekly bar represent that week data.
Figure 1.2 - Bearish Bar & Bullish Bar Respectively
Figure 1.3 - Bar Chart
Candlestick charts originated in Japan in the late 18th century hence it is also called as Japanese Candlestick Chart. It is presented to the western world by Steve Nison. Candlestick chart is often effective when used with other analytical tools like Fibonacci retrace. Candlestick chart uses the colour code method to represent the bullish or bearish nature of plotting. First, let us understand how the candles are plotted. Candlestick is formed by two sections, one is called the wick and the other one is the body of the candle. The area between open and close is called the body of the candle. The price excursion above the body is called a higher shadow or high & the price excursion below the body of the candle is called a lower shadow or low. If the colour of the body is white or empty or any light in colour then it is called a bullish candle because the close is above the open price and if the colour of the candle is black, filled or any dark colour then it is called as a bearish candle because its close is lower than the opening price. (Refer to Figure 1.4)
Figure 1.4 - Bullish & Bearish Candle Respectively
Figure 1.5 - Candlestick Chart
Point & Figure Chart (P&F)
A Point and Figure chart plot the price movement of a particular script or stock without consideration of the time scale on the chart. As shown in Figure 1.6 below the ‘X’ represent the rise in price and the ‘O’ represent the decline in the price. The chart provides the setting of box size & reversal amount to be filled by the user. The box size dominates the factor whether the chart will plot ‘X’ & the reversal amount will responsible to plot ‘O’. Example: If the box size input is of 5 then for any 5 Rs increase in price the chart will be plotted with ‘X’ and when we move from an ‘X’ column to ‘O’ column, this is determined by reversal amount. In the P&F Chart there is no role of time, its price dominant chart.
Figure 1.6 - Point and Figure Chart Settings
Figure 1.7 - Point and Figure Chart
Renko Chart invented in Japan. Like P&F Chart it too ignores the time frame and considers the fixed increase in price or decrease in price. Instead of the ‘X’ column or ‘O’ column, it uses a fixed brick type price presentation. These price bricks are called blocks or boxes. Renko charts are based on bricks with a fixed value that filters out smaller price movements. A regular bar, line or candlestick chart has a uniform date axis with equally spaced days, weeks and months. This is because there is one data point per day or week. Renko charts ignore the time aspect and only focus on price changes. If the brick value is set at 10 points, a move of 10 points or more is required to draw another brick. Price movements less than 10 points would be ignored and the Renko chart would remain unchanged.
Figure 1.8 - Renko Chart Settings
The input to the Renko Chart can be the fixed value as well as ATR (Average True Range) value. A specific point value means brick size will remain constant even as new data is incorporated into the chart. In other words, new price data is added every trading day and the brick size will remain constant. The two charts above have a fixed value and each brick represents ten points.
In contrast to fixed price bricks, using ATR values results in the fluctuating brick sizes. The default ATR is based on 14 periods and the Average True Range fluctuates over time. The brick size is based on the ATR value at the time the chart is created. Should the ATR value change the next day, then this new ATR value will be used to set the brick size. Also note that ATR values are based on standard charts, such as close-only, bar and candlestick. These charts have one data point per period and a uniform x-axis (date axis). The ATR value shown on these charts can differ from the ATR brick value on a Renko chart due to rounding issues.
Figure 1.9 - Renko Chart
Heikin Ashi Chart
The Heikin-Ashi technique is a Japanese candlestick-based technical trading tool that uses candlestick charts to represent and visualize market price data. It is used to identify market trend signals and forecast price movements. The Heikin-Ashi method uses average price data that helps to filter out market noise.
The absence of market noise results in a clear illustration of market trends and direction which helps determine potential price movements. The trading technique assists traders in identifying when they should hold on to a trade, pause a trade, or identify if a reversal is about to occur. Traders can adjust their positions accordingly, i.e., either avoid making losses or lock in a profit on the chosen position.
Figure 2.0 - Heikin Ashi Chart
The technique shares some characteristics with the traditional candlestick charts used in trading but differs in how the values for candlesticks are computed. In Japan, the word Heikin means “average” or “balance,” and the word Ashi means “bar” or “foot.” Hence, Heikin-Ashi means “average bar,” resonating with the trading technique, which uses the average price of the security. When calculating the Heikin-Ashi formula, we use the open-close data from the previous period and the open-high-low-close (OHLC) data from the current period. Modified OHLC values are displayed as candlesticks.
Which Type of Chart to Use?
There are more charting methods available like Kagi Chart, Renko Chart, Three-line Break Chart, Point & Figure Chart etc. other than a traditional method like line chart, bar chart & candlestick chart. They all present the same data but provide their unique interpretation. They do have their drawback and advantages. In summary, the charting method is just a way to read the data at the end it’s the key decision of the trader that matters to the trade. A trader should pick the charting method that should be simple to understand and should represent the price flow or trend. And these two factors are covered under the candlestick charting method. Thus I use the candlestick charting method.
Factors affecting Successful Chart Analysis?
Stick to the Principles: I have observed that most traders or investors formulate the trading strategy on random assumption. Better they stick to the principles of technical analysis. A trader must make it sure that the strategy he or she deploying should be based on the principles of technical analysis or in other words the logic involved in trading strategy should be based on technical analysis. It should be back-tested with substantial data.
Focus on your niche: We as a trader can not focus on every move in the market neither we can trade every script. So it’s very important that we should focus on our trading system and its entry and exit signal rather than wondering about our missed trading opportunity somewhere. In other words, never compromise with its own trading system.
Consistency: Whatever you do whether it is a trend following on daily chart or scalping or swing trading, I request you to do it with consistency. Success comes to those who are consistent for it.
Follow the routine: As a trader, your job is to update the information, find some opportunities and execute them. But to achieve this you must be consistent with the daily routine such as updating charts regularly at a particular time on each day, analyzing the trading opportunity etc.