Technical analysis is the study and investigation of the market behavior using charts.
Trading systems enable trailers to analyse the market using various types of charts.
Chart analysis requires the development of visual skills. To develop these skills, let’s first learn about the three most common types of graphs.
A line chart is the most simple and basic of the three types of charts.
It is created by connecting various price units over a given time period, each point only represents the closing price.
The line connecting all the points creates a chart that helps to identify trading trends as well as support and resistance levels.
Technical analysis usually requires more specific information than that provided by a line chart so this chart is appropriate for in-depth analysis.
A bar chart includes lines that present different price levels over a given time frame distributed a graphical diagram.
These lines to note the following information.
- High Price – This is the highest point of the bar representing the maximum bullish power for that bar.
- Opening Price – Displayed to the left the bars body representing the price from the bar opened. The bar’s opening price is usually identical to the closing price of the preceding bar.
- Closing Price – Reveals the results of the fight between the bulls and the bears over the course of that bar.
- The closer to the closing prices to the high price, stronger the bulls victory over the bears over the course of that bar.
- Low Price – The low point of the bar representing the strongest point of bears reached over the course of that bar. The distance between the bars high and low points signifies the intensity of the battle between the bulls and the bears.
A short bar indicates a calm quiet market while the long bar signifying volatile story market.
The Japanese candlesticks
The Japanese candlesticks chart is similar to the bar chart in that it also represents the closing, opening, high and low points for that bar, but using a different display which helps identify various trading patterns.
The different to the charts is that in the Japanese candlesticks chart, the closing and opening prices are enclosed in a rectangle.
The use of different colors illustrate the increase or decrease in price over the course of the bar.
This is the most common type of chart.