These are the plottings of prices and trading volumes on charts. The purpose of reading and analyzing these charts is to determine the demand-supply equation at various levels and thus to predict the direction and extent of future movement of the prices. The charts are not infallible but because of their repeated accuracy, they have come to be accepted. In all the charts, a correlation exists between market price action and the volume of trading when the price increase is accompanied by a surge in trading volumes, it is a sure sign of strength. On the other hand, when the decline in share prices is accompanied by increased volumes, it is indicative of the beginning of the bearish trend.
There are four ways to construct a chart.
These are Line Chart, Bar Chart, Candle Stick Chart, and Point & Figure Chart.
1. Line Chart
The Line chart is a style of chart that is created by connecting a series of data points together with a line. This is the most basic type of chart used in finance and it is generally created by connecting a series of past prices together with a line. Line charts are the most basic type of chart because it represents only the closing prices over a set period. The line is formed by connecting the closing prices for each period over the timeframe and the intra-period highs and lows of stock prices are ignored. This type of chart is useful for making broad analysis over a longer period of time.
2. Bar Chart
Bar charts expand upon the line chart by adding the open, high, low, and close – or the daily price range, in other words – to the mix. The chart is made up of a series of vertical lines that represent the price range for a given period with a horizontal dash on each side that represents the open and closing prices. The opening price is the horizontal dash on the left side of the horizontal line and the closing price is located on the right side of the line. If the opening price is lower than the closing price, the line is often shaded black to represent a rising period. The opposite is true for a falling period, which is represented by a red shade.
3. Candlestick Charts
Candlestick Charts like a bar chart, candlestick charts have a thin vertical line showing the price range for a given period that is shaded in different colors based on whether the stock ended higher or lower. The difference is a wider bar or rectangle that represents the difference between the opening and closing prices.
Falling periods will typically have a red or black candlestick body while rising periods will have a white or clear candlestick body. Days, where the open and closing prices are the same, will not have any wide body or rectangle at all.
4. Point and Figure Charts
In this type of chart, the emphasis is laid on charting price changes only and time and volume elements are ignored. The first step in drawing a figure and point chart is to put an X in the appropriate price column of a graph. Successive price increases are added vertically upwards in the same column as long as the uptrend continues. Once the price drops, the figures are moved to another column, and Os are entered in downward series till the downward trend is reversed.