Before plunging into the abyss of charts, levels, figures, indicators and other ways of constructing a price chart, it is necessary to clearly understand the main parameters of the analyzed chart – its display type and timeframe.
Most often, the movie shows traders’ terminals with a graph in the form of a line:
This way of displaying changes in a two-dimensional plane is familiar from school, but from the point of view of stock trading, it is imperfect and uninformative.
And here’s why. Firstly, it is important to understand that a point on the chart is the price of an asset for a certain period of time (timeframe), and since thousands of transactions are made every second in the world, a point on a 5-minute chart is unlikely to show us the entire history of price movement for these 5 minutes.
To make it even clearer what we are talking about, consider the illustration.
Here, as you can see, the history of price changes in one hour is shown. It is clearly seen that during this period, the price from the Open level reached its maximum value (High), minimum (Low) and closed at Close. This display option is called a Japanese candle.
This is another example, this time the most popular and used by professionals, of displaying a chart – a candlestick chart:
We see that on such a chart, candlesticks are colored in 2 different colors. These are bullish and bearish candles. The difference between them is only that the closing price (close) of bullish candles is higher than the opening price (open), and bearish ones – on the contrary. This should be understood in such a way that, in general, over the selected period (timeframe), the price has changed in the direction of increase (decrease).
It is also commonly interpreted as the power of bulls or bears – two irrepressible opponents and permanent symbols of stock trading. To understand where prices are moving in one direction or another, it is enough to remember how these animals attack: bull – he throws his prey with his horns from the bottom up, and the bear, on the contrary, knocks down the prey with a powerful paw from top to bottom, to the ground. Thus, the price moves either up or down, well, or at the onset of equilibrium – to the side, without leaving the channel.
Historically, observing the formation of the chart, experts have learned to identify combinations of such candlesticks (figures, patterns), after which the situation developed the same way: after some the trend persisted (continuation figures), and after others it changed (reversal figures).
Analyzing such a chart, a trader understands that he no longer sees the average price, as on a linear chart, but the whole picture as a whole:
And this, mind you, without auxiliary tools!
Candle analysis is a topic as ancient and deep as the whole history of the glorious people of Japan. You can read more about this in the article “Candle analysis”.
There is another common type of chart display – in the form of bars:
On such a chart, 4 prices are also displayed in each element (bar) at the same time, as in the variant with Japanese candlesticks, but visually, according to many, this is not attractive enough. If Japanese candles have an almost 500-year history, then bars were invented in America at the beginning of the last century. It should be noted that it is as informative as candles, but its graphical implementation makes it difficult to perceive.
Which of these chart options to choose for analysis is up to you, it’s a matter of everyone’s taste, the main thing is that the result in profit is positive!