Types of Charts in Stock Market

Analyzing the stock market is an important skill that every stock market investor should have to earn decent profits from their investments. Broadly there are two prominent methods of analyzing the stock market and one of them is called technical analysis.  

It is about using stock prices at different time periods in the past to form a market trend. Historical market trends from a stock chart form the basis of technical analysis. On the basis of stock charts, a trend analysis is performed and once the market trend and right price is inferred, investment decisions are made on the basis of these stock charts. There are various charts in stock market but some of the prominent of them are: 

1) Line graph 

2) Bar Graph 

3) Candlesticks 

4) Heikin-Ashi charts 

 

 

What are stock market charts? 

A stock market chart is a graphical representation of historical stock prices or trading volumes. There are numerous ways to represent this relationship through multiple charts. As a skilled technical analyst, it's up to you how you identify the type and deduce the most effective trend.  

Stock charts are similar to other charts and have two axis- vertical axis (Y axis) and horizontal axis (X axis). The X axis depicts the different time periods of share prices in a chart, whereas the Y axis shows the prices of share/shares at different time periods.  

 

 

Types of charts 

In the start, we talked about the four well-known charts in the trading world. Let’s dive deep into the details of these charts and how trade uses them to make the right decisions in the stock market. However, before doing that it’s important to understand the concept of trend lines and trend lengths as they are the primary tools for the analysis of technical charts.  

 

Trend lines 

The straight line that helps in identifying and confirming the direction of a trend by joining the tops and bottoms on a stock chart is known as a trend line. This line assists both the traders and investors in understanding support, resistance, and trend strength historically and make future investment decisions accordingly. It is a simple tool, yet it plays a major role in technical analysis as it helps to identify trends, set targets, confirm trend reversals and to draw entry and exit points. 

 

 

Types of trend Line 

There are mainly three types of trend line which are: 

i) Uptrend line- This line is formed by connecting higher lows in an upward-sloping manner that shows bullish trend and indicates that buyers are in control resulting in prices rising. 

ii) Downtrend line- This line is formed by connecting lower highs in a downward manner showing bearish trend that indicates that sellers are controlling the market resulting in prices declining. 

iii) Sideways trend- This line forms when the market is in consolidation phase and the movement of prices is within a specific range indicating neither rising nor falling stock prices. In this phase trend lines form a horizontal channel indicating indecision in the market. 

  

1). Trend length 

Technical chart analysis not only detects trends but also tries to predict how long they will last. Primary trends show the biggest and most long-lasting price moves, while minor and secondary trends usually do not have enough momentum to change trends. Trend line analysis can also help in detecting the trend length.  

For instance, if a stock price continues to make higher highs but the retrace is getting progressively smaller, that would give a very strong indication of uptrend. Others such as head and shoulders, inverse head and shoulders, and double tops/bottoms will help one further estimate the strength of a trend and how long it will last. 

Now let’s move on to the types of charts which are most popularly used for technical analysis in the stock market: 

 

2). Line Graph

 

The line chart is one of the most basic and simplest charts for analyzing stock movement on a chart. It consists of the information about the stock price or trading volume on the Y (vertical) axis and the corresponding time period on the X (horizontal) axis. Trading volume is the total number of shares that were traded on the stock market on a specific day. 

Normally, a line graph is constructed by taking different stock prices on different days and representing it by dots on the chart in such a manner that it is plotted above the corresponding dates on the X axis. After this, you can draw a line to connect the dots with each other thus forming a line chart.  

It is a series of data points connected by straight line segments providing information about stock price. Line graph is used by traders and investors for its ease, assistance in identifying trends and use in technical and fundamental analysis.  

Ex- A Nifty50 line graph will show you the trend of its movement in the last one month by showing its closing prices of each day of the last month. 

 

 

3). Bar Charts

 

A bar chart provides deeper information than a line chart regarding the behavior of stock prices during the trading session in a day. Here instead of a dot each marking on a bar chart is a vertical line which has two horizontal lines coming out of it from either side.  

The top end of the vertical line denotes the highest price of the stock the line represents during the day while the bottom point denotes the lowest trading price of the stock during the session. The horizontal line coming out from the left side of the vertical line is the opening price of the stock of the day. Similarly, the line protruding from the right side of the vertical line is the closing price of the stock of the day.  

The bar chart is more informative in comparison to the line chart as along with price changes it also reflects the volatility in stock prices during the day. The longevity of the bar line denotes the difference between the opening and closing prices of the stock during the session. The longer the line, the higher the difference and the higher is the volatility which means more risk.   

 

4). Candlesticks charts 

Candlesticks can be termed as the modified version of bad charts. Instead of vertical lines, these charts are made up of rectangular blocks with slim vertical lines coming out from both ends.  

The line coming out from the top denotes the highest trading price of the day whereas the one coming out from the bottom shows the day's lowest trading price. The upper end and lower end of the block of the triangular chart, also called the body signifies the opening and closing price of the day. If the closing price is higher than the opening price, then it will be at the upper end of the block and vice versa. 

Candlesticks is an enhanced version of the bar chart as it gives an idea of the volatility of the entire period under consideration rather than just of the day, which is in the case of bar charts. The candles on the candlestick charts can be of two types- Black and White. If the opening price is higher than the closing price, then the candles will be of lighter shade (white).  

On the other hand, if the closing price of the day is higher than that of the opening price then the shade of the candles will be darker (mostly black). Intraday charts represent the trading done on a single day. The extent of variations in the colors of the candles depicts the degree of volatility during a time period. The more the variation, the higher is the volatility and vice versa. 

 

5). Heikin-Ashi charts 

Heikin-Ashi means "average bar" in Japanese is a filtered version of candlesticks where price trends are further simplified, and market noise is filtered. It assists traders and investors in identifying trends more easily than candlesticks. Traders who want to understand the market better use this chart with other charts to make meticulous decisions. Each candle in Heikin-Ashi method is calculated as follows: 

  

Open = (Previous Candle Open + Previous Candle Close) ÷ 2 

Close = (Open + High + Low + Close) ÷ 4 

High = Max of (High, Open, Close) 

Low = Min of (Low, Open, Close) 

  

Green candles having no lower shadows is a signal of strong uptrend indicating a strong buying momentum in the market. Whereas if red candles are formed without upper shadows, it marks a strong downtrend indicating strong selling pressure. However, if there are small candles with both a mix of upper and lower shadows it is a sign of trend reversals or market indecision. 

 

 

Final Thoughts 

Line charts, bar charts, candlestick charts, and Heikin Ashi charts depict different aspects of the movement of stock prices. Since line charts show simple trend views, greater information is illustrated with bar and candlestick charts.  

Unlike these, Heikin Ashi charts filter the noise of the market and bring out trends. By learning to understand these charts, traders can make better strategic investment decisions-whether it be in short term fluctuations or a long-term trend in the market.