Bar Charts
Perhaps the most commonly used chart for Western traders, and one which includes all four prices for each day, has been the daily bar chart. This is called a bar chart because each day is represented by a vertical bar which goes all the way from the low price to the high price. The opening price, coming into the day, is a short horizontal line called a tic which is drawn on the left of the bar and coming into the bar. At the end of the day, the closing price is represented by a tic leaving the bar to the right. Here’s a simple example for the same share in the same week.
How Useful are Bar Charts to Traders and Investors?
Bar charts contain plenty more information than simple line charts. Whereas line charts only show closing prices, bar charts display the opening and closing prices, as well as the high and low prices, for each period.
As you can see each bar has the shape of a ‘tree’. You create a bar chart by plotting a series of such bars across it. Each bar makes up one trading period. To create a bar, you simply need to plot the high and low prices of a trading period and then connect the two points using a vertical line. This makes up the ‘trunk’ of the tree for which the highest price will always be located at the top and the lowest price at the bottom.
After that you plot the opening price value to the left of the vertical line you have drawn, and then connect that point to the vertical line (i.e. the trunk) with a horizontal line (this looks like a ‘branch’ of a tree located on the left). Finally, you need to plot the closing price to the right side of the vertical line (the trunk), and connect that point to the vertical line with a horizontal line (which looks like a branch on the right).
Explaining Bar Charts
With a bar chart you can immediately see whether a stock has gained or lost value between the opening and closing market sessions. If the ‘branch’ on the right is located higher than its counterpart on the left, then this implies that the value has climbed between the open and close. If the ‘branch’ on the right is lower than its counterpart on the left, then the value fell between the open and close.
At the same time, the height of the ‘trunk’ alerts you whether the value of the share has fluctuated wildly during the trading for this period. A short ‘trunk’ (or, indeed, if it has no height at all) means that the price kept stable.
Okay, it looks more confusing than a line chart, but it’s still quite easy to understand, and knowing about the bar chart adds enormously to your trading information. On the other chart, the closing price on Monday was 52, and that’s the same on this chart. It’s represented by the tic pointing out to the right of the first bar, which is Monday. But we can also see that Monday started out at 53, as the tic to the left of the line is at that level, and the shares traded all the way between 51 and 54 during the day.
On Tuesday, which the other chart just showed us was a ’52-1/2′ day, we can see from the bar chart that when the market opened the share had fallen down to 51-1/2, and during the day the low point was 51. In fact, the closing price of 52-1/2 was the highest price that the share made all day, which we can tell because the closing tic is at the top of the bar. Instead of a straight rise in price, as shown on the line chart, we can see that the share had some struggles with its value at the start of the week.
So you can see there’s a lot more information available when you use a bar chart rather than a line chart. Look at the other days and see what the bars are telling you. Note that on Thursday the open and close prices were the same, at 53, although the shares varied in price from 52 to more than 54 during the day. The other point to note is that the closing price on one day and the opening price on the next don’t have to be the same. Sometimes traders get caught out if there’s a big difference, or ‘gap’ as it is called, which went against them, but gave them no opportunity to sell their holding in-between.
Another point about daily charts that you will notice is that they only show five bars for the week, corresponding to the five trading days, and that the next week starts immediately adjacent. Not only are there no bars for the weekend, because there is no trading, but there is also no space between the weeks for Saturday and Sunday. You will mainly notice this if you are trying to look at a particular date, as you can’t just count the bars across, as not all dates are represented.
Just a note about other timescales. As I said in module 1, technical analysis can be applied across any timescale you want, whether shorter at say 5 minutes, or longer such as a week or a month. When the timescale is during a day, such as in five minute divisions, then it is called intraday, and is usually used for day trading. Longer time scales such as weekly are used for other reasons, as we’ll see later. Exactly the same principles apply when drawing the bar.
For instance, if you were to draw a weekly bar chart for this share including this week, the length of the bar would be from the lowest to the highest price during the whole week, which is from 50 to 54.5. The opening price would be the first price of the week, which is Monday’s open at 53, and the closing price would be Friday’s close, which is 52. So you can always go from a shorter timescale to draw a longer timescale, losing some of the intermediate information. You obviously can’t take a weekly chart and use it on its own to draw a daily, as you don’t have all the numbers.
The information that bar charts portray can be used as a predictive tool. If a stock closed on a high, for instance, the ‘branch’ on the right would be located at the top of the ‘trunk’. So if you were mainly interested in short-term gains, you might well assume that odds are that the the stock is likely to continue rising as soon as trading re-opens. This would of course be a bit of a gamble but a bar chart’s function is to provide you with information to make an intelligent decision. Bar charts are also useful to identify trends. If the price of a share rose during the period in consideration, then it means that investors were bullish (i.e. confident and willing to buy). If the price lost ground during the period, then investors were bearish (i.e. not confident and likely to sell).
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