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Charts capture price movements of a stock over specific time frames. These are graphical representations of how stock prices moved in the past. Typically, the x-axis represents time and the y-axis represents price. A Chart can also depict the history of the volume of trading in a stock. That is, a Chart can illustrate the number of shares that change hands over a certain time period.
Three of the most commonly used Chart types are:
When you draw a line connecting the closing prices of a specific stock or index over a given period of time you get a Line Chart. It is particularly useful for providing a clear visual illustration of the trend of a stock’s price or a market’s movement. Line Chart is widely used by beginners to draw trend-lines.
A Bar Chart tracks four price points for each trading day - open, high, low and close. Bar Chart is one of the most popular charting techniques to see price action in a stock over a given period of time. Although daily Bar Charts are best known, Bar Charts can be created for any time period that can range from 1 minute, 5 minutes, 1 day, 1 week, etc.
Candlestick adds visibility to Bar Chart. Notations used in Candlestick are symmetric unlike the notations used in Bar Chart. A Candlestick displays the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that visually represents the fight between the bulls and bears. Each Candlestick represents one period (e.g. a day) of data.
Scaling is an issue that is often overlooked in Technical Analysis. There are two axes on any market chart. The x-axis along the bottom, registers the timeframe and the y-axis, the price. There are two methods of plotting the y-axis: arithmetic and logarithmic.
Arithmetic charts allocate a specific point or Rs amount to a given vertical distance. The arithmetic scale suppresses price fluctuations at low levels and exaggerates them at high points.
A logarithmic scale allocates a given percentage price move to a specific vertical distance. There is very little difference between the scaling methods when charts are plotted over short periods of time. However, for analysis of charts over a long time frame, it is better to make use of logarithmic scale.
Chart depicts the historical price, volume action of scrip.
Line Chart, Bar Chart and Candlestick are the most commonly used charts in Technical Analysis.
Candlestick provides the most price information to a trader in one go compared to the rest two charts.
Over a short term time frame, there is very little difference between the two scaling methods. For longer time frames, it is better to use logarithmic scale.