How to Use Charts for Smart Trading Decisions

A single line goes from left to right and each point represents the price at the end of the day (close price). Usually, a graph shows the closing price as a single point.

Some traders like it because it is clear and easy to get a general idea of the direction of price movement in the market. Even though this chart doesn’t show much about how prices change during the day, many traders believe that the closing price is more important than the opening price, the high price, or the low price during a given period.

This chart is best used for: presenting direction. You can see at a glance where prices have been, and where they appear to be heading in the future.

They are a set of vertical lines that show the range of prices for that time frame. The horizontal line on the bar’s left side shows the opening price. The horizontal line on the right side of the bar shows the price at the end of each day.

If the opening price is less than the closing price, the line is often colored black (or green) to show a rising period. A falling period is indicated by red. This chart is best used for: finding patterns.

These charts offer the open, high, low, and close prices, as opposed to just a snapshot of the closing prices.

The main part of the chart showing prices looks like a candlestick, with a thick “body” and a line that usually goes above and below it. These lines are called the upper shadow and lower shadow respectively. Some people also refer to them as upper and lower “wicks.”

The high price is shown by the top of the upper shadow, and the bottom of the lower shadow shows the low price. Both the body and the shadows make patterns. The candlestick extends between the opening and closing prices.

It is typically black or red when the security closes at a lower price and white or green when it closes at a higher price. These show us all the highest and/or lowest prices during that time, along with the price at the end of the period and the price at the beginning.

This chart is best used for: identifying market trends, especially over a short period. It is most useful at the end of an uptrend or the beginning of a downtrend, when the trend is likely to change.

The length of the candlestick shows the distance from the high to the low. The length of the body shows the difference between the open price and the close price. The wick can be on one end, the other end, or both ends.

A wick on top of the body shows how far away the high is from the open or close, depending on which is closer. A wick below the body shows how far away the low is from the open or close, depending on which one is closer.

A candlestick can have a hollow or solid body.

• Hollow: A bullish candlestick has a hollow body. The open is less than the close.

• Solid: Bearish candlesticks are those that have a solid body. The close is less than where it started.

A candlestick can also be one of three different colors.

• Green (Up): The closing price of the current candlestick is higher than the closing price of the previous candlestick.

• Grey (neutral): The end of the current and previous candlesticks is the same.

• Red (Down): The end of the current candlestick is lower than the end of the previous candlestick.

This chart is best used for: comparing close price trends, especially over a short period. However, generally, hollow candles are more complex than candlesticks. Thus, I don’t recommend using hollow candles.

A column chart is a visual representation of recorded data in the form of vertical rectangular bars or columns charted along two axes, with the values representing the measure of that data category.

Most of the time, the values are given in units or percentages related to the problem statement. This chart is best used for: comparing statistics. However, bar charts make it difficult to visualize the data and make at-a-glance comparisons, making them impractical compared to other types of graphs.

An area chart is a graph that shows how the numbers in one or more data sets change concerning a second variable. Most of the time, this second variable is time.

This chart is best used for: evaluating proportions. For example, market analysis or demographic change chart might show how the proportions of different age groups in a population change over many years.

This makes baseline charts more interactive, and you can analyze several different factors. Some elements of baseline charts include:

1. Price Source: The values of the time bars shown on the chart. You can do any of the following: Close, Open, High, Low, (High+Low)/2, (High+Low+Close)/3, and (Open+High+Low+Close)/4.
2. Line Up: the color and width of the line that makes up the top border.
3. Line Down: the color and width of the line that shows the bottom border.
4. Fill up: lets you change the color of the fill in the top area.
5. Fill Down: lets you change the area’s color at the bottom.
6. Base Level: The value of the line level as a percentage of the height of the pane:
   • The value is already set to 50 percent.
   • 0 percent is the same as the bottom edge of the pane, and 100 percent is the same as the top edge.
   • The value of the level is written on the chart.

This chart is best used for: determining the reasons why prices go up or down and identifying fluctuations.

Most of the time, I use High-Low Charts to show daily stock market price data, usually the day’s high, low, and closing prices [High-Low-Close Charts]. These charts show the same information as a candlestick chart, but with a more neutral appearance.

This chart is best used for: identifying volatility at a glance. Larger bars suggest more volatility in the market, so it’s easy to quickly ascertain those changes using a high-low chart.

The main difference between candlestick charts and Heikin Ashi charts is that the average price moves on the HA chart, which makes it look better.

When there are a lot of green HA candles with no lower shadow, this shows a strong uptrend. When there are lots of red HA candles with no upper shadow, this shows a strong downtrend. Since the HA price bars are average, they don’t show the exact open and close prices for a specific period.

Day traders mainly use Heikin Ashi charts as an indicator. This chart is best used for: seeing trends going up or down, especially for data sets where the candle is not formed well or there are a lot of gaps. In those situations, an HA chart would be easier to read.

These simple charts only show the significant changes in price and leave out the “noise.” Point-and-figure charts are made up of columns of Xs and Os that show how prices have changed over time. Prices going up are shown by X-Columns, and prices going down are shown by O-Columns.

Each price box has a certain price level that the price must reach for an X or an O to show itself. P&F charts don’t take time into account. If prices don’t change, the P&F chart won’t either. Marking P&F charts can be done in many different ways, like just the close or the highs and lows.

The size of the box can be placed to a number or a percentage. This chart is best used for: spotting trends and figuring out where support and resistance levels are. Point and figure charts make it easy to draw trend lines and support and resistance levels.

This chart is made up of bricks that are white/green and black/red. These are based on whether the price has gone up or down since the last brick. Depending on the size of the brick, a new one is put in if it doesn’t add up to enough.

When the price of the security goes up, white/green bricks are used, and when it goes down, black/red bricks are used. It’s important to note that a new brick is only implemented if it meets specific volatility criteria, which can be a big plus or minus for traders.

It can be placed in minutes or take more than a day, depending on market conditions. This chart is best used for: an easy way to find support and resistance, the overall trend, and ways to eliminate the noise.

It comprises a series of vertical blocks called lines, which show the market’s direction based on the prices at the end of the day. Most people call line break charts “three-line break” charts. This is because once there are three lines in a row in the same direction, the close must “break” the last three lines to draw a line in the opposite direction.

For example, if there are three consecutive up lines, the close would have to break below the low of the last three up lines before a downward line could be drawn. This chart is best used for: comparing a current line with the closing price of a previous line.

Thick lines are drawn whenever the value of the underlying asset breaks above its earlier high price, which indicates that there is more demand for the asset. When the price falls below the previous low, which is shown by a thin line, the supply goes up. This chart is best used for: reducing noise because Kagi charts mostly operate independently of time.

This feature can help you avoid lousy congestion with useless Doji-like bars. If you use them right, they can help you see the market in a new way. Time is not taken into account in range bar charts.

This gives you a chance to think about the relationship between price and volume. You can see how the market is set up with range bars and a volume plot. It shows dynamics that are hard to see on standard time charts.

The things you learn can help you make a map of support and resistance zones that you can trust. This chart is best used for: making it easier to understand how prices move. If you add volume to the mix, you can get even more out of it.

Wrap up:

In short, each chart is helpful in its way, but how you use them depends on what kind of trader you are—scalper, day trading, investor, and so on— and what strategies you like to use. They are beneficial in providing an idea of how securities work in general. As a businessman in the share market, you need to know how to read a chart and understand the information it shows.

It can help you find price patterns in the stock market and make better trading decisions. If I were to mention the charts I use most in my transactions (based on priority), it would be candlesticks, line charts, Heikin Ashi, and point and figure. How about you – do you have types of charts that you use regularly? I’d love to hear your thoughts.