Updated: Aug 29, 2021
A good trading strategy will give steady success, life-changing income, especially if a trader can execute it without taking more risk in one trade.
The technical analysis supports a diverse variety of charts, and many good trading strategies are using various charts.
As most traders know, charts are graphical displays of the price information of securities over time. They offer immense help to technical analysts to decide the Entry and Exit points and Stop Loss.
It is better to know the various varieties of charts used in stock market trading. Below are some of the essential chart types.
A line chart is the simplest form of chart and is formed by connecting the closing prices for each period over the selected time frame.
It will not contain open, high, or low values of the selected period, and typically, investors use this chart to spot a trend.
Bar chart or OHLC chart
A bar chart is made up of a series of vertical lines representing the price range for a given period, with horizontal dashes on each side that represent the open and close prices. It is also recognized as the OHLC chart as it indicates open, high, low, and close.
The opening price is the horizontal dash on the left, and the horizontal dash on the right represents the closing price.
In some software, the color of the entire bar is constant. However, in some cases, the bar's color is green when the closing price is above the open price, and the color of the bar will be red when the closing price is below the open price.
Candlestick charts are the most popular chart patterns among traders. They are invented in Japan over 300 years ago.
A chart with open, high, low, and close data in the form of a candle is a candlestick chart.
Both the bar and candlestick charts provide the same data. However, the candlestick chart is easier to read and more visually appealing.
Rising time periods (when the closing price is greater than the opening price) will have hollow bodies.
Block candlestick bodies represent falling periods (when the closing price is less than the opening price).
Nowadays, every software represents bullish candlesticks with green bodies and bearish candlesticks with red bodies.
Renko charts remove small fluctuations in the price compared to candlestick charts; hence it is easy to identify the trends and reversal in trends.
It looks simple and easy to read as all the Renko bricks are uniform in nature. Due to this simplification, some of the short-term information is lost. Hence, only swing traders or trend followers use this chart.
The vital step in setting up a Renko chart is setting the size of the brick. It can be 50 points in some stocks, 10-20 pips in the forex market, or some dynamic value based on Average True Range (ATR).
The most crucial difference between the Renko chart and the candlestick chart is the Renko chart's smoothness.
Each Renko brick is of the same length and uniform in look. A new Renko brick always appears at the right top or bottom of the current brick, which indicates that price action is plotted only in 45-degree angles (+ or -).
Point and Figure Chart
A point and figure chart ignore 'time' completely while plotting the charts for stocks, commodities, or forex market.
As compared to candlestick charts, point and figure charts will plot vertical columns, which consist of 'X' or 'O’ depending on the price move upside or downside. The ‘X’ indicates the rise in prices, whereas ‘O’ suggests the fall in the price.
Heikin Ashi Chart
Heikin Ashi charts are the extended version of Japanese Candlestick charts. It uses the open-close data from the prior candle period and the open-high-low-close data from the current period to create a heikin ashi candlestick.
Hence, it removes the gaps between candles and filters out the noise. Because of this feature, it is highly beneficial to capture the trend.
Below are some of the vital features of the Heikin Ashi charts.
The green candles with no lower wick indicate a strong uptrend
Small candles with wicks on both sides (Doji or spinning tops) indicates a trend change
The red candles with no higher wick indicate a strong downtrend
Kagi charts are similar to Point and Figure charts. But ‘X’ and ‘O’ columns are replaced by simple lines and sometimes by yin and yang lines.
Investors primarily use this chart as it takes out the equation of “time,” and change of direction occurs only when the security moves by specific points. These charts are used to identify the long-term reversals.
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