The basics of technical analysis
Types of charts
The first thing you'll need to understand as a technical analyst is the different types of charts at your disposal and their relative benefits.
Charts come in three main forms: line, bar and candlestick. Let's have a look at how each type works.
This is the simplest form of chart - essentially just a number of data points joined by a line. This type of chart shows the historic price movement of an asset in a very clear and simplistic manner.
Unlike their bar and candlestick cousins, line charts only display the closing price of an asset over time. So if we look at the daily chart for spot gold, for example, each data point represents the closing price for gold on that day.
The benefit of using line charts is that they can make patterns easier to spot. However, due to their simplicity, you can miss some of the important price movements that occur between the open and close of each data point.
Bar chart (also called HLOC chart)
More complex than line charts, bar charts show the opening and closing prices as well as the highs and lows for each period. That's why they are sometimes called HLOC charts, because they display the High, Low, Open and Close.
The very top of each bar represents the highest price traded during that period, while the bottom signifies the lowest. The horizontal notch to the left is the opening price, and the notch to the right is the closing.
Often bar charts are in black and white, but they can also be displayed in colour, as shown on this five minute chart of the FTSE 100. In this case the red bars represent a five minute period where the price has dropped, while the green bars represent a five minute period where the price has risen.
These show exactly the same data as bar charts but represent the information slightly differently. Here the body of the candle signifies the open to close range, the wick is the high/low range, and the colour displays whether the price has gone up or down.
Traditionally, candlesticks charts were always shown in black and white, but most charting platforms now use red and green instead.
- A red (or black) body signifies a period in which the price has decreased
- A green (or white) body signifies a period in which the price has increased
Candlesticks are generally the most popular type of chart with traders, as they are able to convey a large amount of data quickly, in a visually pleasing and easily-digestible format. Certain patterns also tend to be easier to spot on a candlestick chart compared to a line or bar chart. Looking at that same five-minute FTSE chart, it's arguably easier to distinguish the market movements and trends on the candlestick chart than on the bar chart.
The shape of each candlestick can also give you clues as to the balance between buying and selling pressure in the market. For example, if a candlestick has a long green body, it shows there's a lot of buying pressure. If it has a long red body, there's considerable selling pressure.
Candlesticks with short bodies and long wicks indicate that there was considerable pressure in one direction, but for some reason the price was pushed back before the end of that period.
We'll look in more detail at candlestick patterns later in this course.
- There are three main types of chart: line, bar and candlestick
- Line charts just display the closing price of an asset over time
- Bar, or HLOC, charts show the high, low, open and close prices for each period
- For candlestick charts, the body of the candle signifies the range between the open and close, the wick is the high/low range, and the colour displays whether the price has gone up or down
- A green (or white) body shows the price has increased while a red (or black) body shows it has dropped
- Long candle bodies and short wicks signify there's been strong buying or selling pressure in one direction
- Short bodies and long wicks indicate there was significant buying or selling pressure in one direction, but that pressure then reversed
Introduction to technical analysis3 min
Types of charts6 min
Support and resistance4 min
Breakouts and fakeouts4 min
Trends and channels4 min
Basic chart patterns: part one5 min
Basic chart patterns: part two6 min
Candlestick patterns7 min
Moving averages5 min
Using moving averages6 min
Choosing your analysis tools5 min