Of bars and candlesticks

A technical analyst would choose the graph or charts depending on his/her requirements. However, the basic function of all technical graphs is the same and that is to capture the trading action for a given time period. The most common and probably the most popular graph is the bar graph. These graphs capture four points – open, high, low and close, for any given time period. Each time period is represented by a vertical bar whose length is defined by the day's high and low.

A tiny horizontal bar on the left-side of the vertical bar represents the opening price of the time period while the horizontal bar to the right denotes the closing. Time period for the bar graphs can vary from intra-day (5-minute, 10-minute, 30-minute and so on), daily, weekly, monthly, quarterly or yearly. It is often seen that securities make inordinately large moves when trading begins in the morning. Such moves are unsustainable and the close is generally within the range established in the previous sessions.

While some schools of analysis such as Elliott Wave Analysis treat these moves as material, most others tend to ignore such short-lived spikes. Another popular graph used in India is the Japanese Candlestick graph.

The data points and time periods for candlestick graphs are similar to that in bar graphs. But the vertical bars are replaced with small rectangles filled with white or black depending on the closing price of the time period. If the close is higher than the open, the candle is white in colour and if the close is lower that the opening, it is black. The area of the vertical bar between the opening and closing price is called the body and filled with colour. The day's high and low extend from the body and are called shadows.

Candlesticks are visually more effective because a user can identify a weak trend by tracking the black candles and similarly identify strength by looking for white candles in the graph. It is often perceived that even though the trend can be up, the security could be undergoing selling pressure at intra-day peaks resulting in weak closes.

This implies that the trend is losing momentum and the stock could be about to reverse. Such a trend can be more easily spotted in a candlestick chart. The other commonly used graphs are line graphs. These graphs need just one data point per time period. The closing price is most frequently for plotting line graphs. These graphs leave out the noise generated by the day's high and low and present the smoothened trend. Though these graphs are useful in tracking the long-term trend, the precise support and resistance levels can not be identified while using these graphs.