Charts are the language of the market. Interpreting charts helps one to read the markets. Any news, event or development affecting the financial instrument is factored in the price. A chartist or a technical analyst then uses various charts to understand the price movements.
There are various kinds of charts that are available and used for understanding price movements in the market.
This is the most basic of all the charts available. It takes into account the closing price of the financial instrument and plots a line through it connecting various periods. It can be read in any time frame and gives the most significant information at the basic level. It indicates where the price closed for that particular period and helps one to recognize the real trend in price.
The bar chart is also another favorite with conventional chartists and analysts. It takes into account four price levels- the open, the low, the high and the close. A bar is then formed on the chart. A green bar indicates that the price opened low and closed high. A red bar indicates that the price opened high and closed low. Bars are continuously plotted and this results in several patterns that are then studied by experts to come to conclusions regarding the future movement of the financial instrument.
This is the most used and popular chart. It was developed by Japanese rice traders centuries ago and is quite similar in structure to the bar chart. The only difference is that instead of bars, candles are constructed and these tell the story in greater detail. A green candle indicates that the price opened low and closed high and a red candle indicates the reverse. Depending on the four levels viz. the open, the high, the low and the close different types of candlesticks are formed. For example, the marbozu, the Doji, the spinning top, the hammer, the inverted hammer, etc. The structures and the patterns formed by theses candlesticks are then studied to arrive at conclusive decisions.
HEIKEN ASHI CHART
Heiken Ashi is a modification of the candlestick chart. Instead of using the values of the open, high, low and close over a time series for its construction, it uses average prices of previous candlesticks to derive its open, high, low and close values. This chart is used in conjunction with the candlestick chart to give a more detailed view.
This is a very unique chart. The word Renga in Japanese means bricks from where it derives its name. This chart is constructed by placing bricks in the next column when the price surpasses the top or bottom of the previous brick by a certain pre-defined amount. This chart is very effective in determining the critical support and resistance levels.