Basic Types of Charts
Price charts present a sequence of price data over a set period of time, which can range from minutes to years. Though there are a variety of price charts, they are all typically formed in the same way: with prices plotted on the y-axis (vertical axis) and time on the x-axis (horizontal axis). Technical indicators are usually plotted underneath or on top of price charts.
In general, daily and intraday charts are used to study short-term price movements, and longer time periods - such as weeks and months - are used to evaluate long-term trends. Though short-term charts illustrate a greater amount of detail, they also capture many sudden - and potentially insignificant - price movements that may distort what's actually happening to the security or the market. Weekly and monthly charts are typically used to study primary, or overall, trends because they help smooth out the fluctuations in prices that occur over shorter time periods.
The basic types of price charts are bar, candlestick, line, and point and figure.
One of the most common types of charts used is a bar chart, where each bar represents one point in time. Though a bar typically represents one day, bar charts can be used to show longer periods, where one bar might represent an entire week or month.
Each bar must show the high, low and closing prices for the security being studied. The top of the bar shows the high, the bottom the low, and a tick mark extending from the bar to the right shows the close. Some bar charts also include the security's opening price with a short horizontal line that extends to the left.
Candlestick charts are like bar charts, but they use a wider bar, which some analysts contend make them easier to read. Candlesticks always show the open, close, high and low prices. If the open is greater than the close, the candlestick is red, and if it's lower than the close, the bar is green.
Line charts show only closing prices, and extend across a price chart as a single line. Because they show less data, line charts tend to help smooth out daily price fluctuations, potentially making trends easier to spot.
Unlike the other basic charts, point and figure charts don't take time into consideration. These charts plot changes in price by using small X and O symbols, where Xs represent rising prices and Os indicate falling prices. Instead of making a new X or O symbol based on time, only price movements that are considered significant are plotted on the graph. As long as the price continues to move in the same direction, additional Xs or O's will be plotted on the price chart. For example, if prices continue to increase over a span of five time periods, five Xs will appear on top of each other in a vertical line. If in the sixth time period, the price declines significantly, an O will appear in a vertical line next to the line of Xs. Proponents believe point and figure charts give clearer portrayals of price trends by smoothing out small and insignificant fluctuations in price that can happen on a daily basis.