Charts are the basis of technical analysis and are where the market expresses its feelings by creating different types of patterns. There are many types of charting techniques. Some may seem better, some worse. In this presentation I would like to point out some of the most popular types of charting techniques but on the other hand I would like to concentrate on one specific type which in my belief is most effective. I will obviously tell you which and why.
Line charts are formed by connecting the closing prices of the specific market, at the given interval. Some trading systems also allow you to forge such charts with the use of opening, maximum, minimum or even average prices.
As you can see you can only make one choice which means that you will lack more information about what the market wants to express.
Bar charts are richer in information, in comparison with line charts because they include:
This can be observed on the picture below:
We can see that a bar is made up of a vertical line showing the range of where prices moved within the given interval. In other words the top of the line is the highest price of the interval, whilst the bottom of the line is the lowest price in the interval. The horizontal line on the left side represents the opening price, whilst the right horizontal line represents the closing price.
So if the left horizontal line is situated higher than the right horizontal line, then this is an increase bar, while if the left horizontal line is situated lower than the right horizontal line, then this is a decrease bar.
You may believe that bar charts include everything that an investor needs to understand the market. I do not believe so. The next charting technique will give you even more information about the market and its behavior.
In my opinion candlestick charts are the best way to understand the market. Before telling you why, let’s have a look at how a candlestick is built.
A candlestick is formed like a bar chart with one exception. The horizontal lines are expanded to both sides, boxed and later filled with a specific color depending on whether this interval encountered an increase or decrease.
In the case of an increase candlestick the color of the boxed part, which we will from now on call the body, will be white or green, whilst the color of a decrease candlestick will be black or red. Obviously these colors can be changed according to will but these colors are most common.
The maximum and minimum prices are represented by shadows coming out of the candlestick bodies themselves.
Now do you know why candlesticks prevail over bar charts?
Candlesticks are not only easier to perceive and observe due to the colors, but they also portray something that other charting techniques do not, the emotions that the market wants to show investors. It may seem that this aspect isn’t all that important and that the major asset of candlesticks is the fact that they can easily be read to determine whether a certain interval encountered an increase or decrease, but what comes with that could be of much help to us. Clear colors and shape give us emotions. We as people smile when we are happy and cry when we are sad. Those are our emotions. I see candlesticks as the emotions of the market. If any investor wants to understand the market in a better way he has to understand the markets emotions.
These emotions take the form of candlestick formations, which means that certain candlesticks form certain shapes portraying what the market may be feeling at the moment. As there are many emotions, there are also many candlestick formations. Some occur more often, some less. If something doesn’t occur often enough then it could be treated as though it doesn’t even exist. For this reason I would like to only describe some of the markets emotions, thus explaining only the most important and most often found candlestick formations. This subject will be treated in the next presentation.