Graphs used on technical analysis show pricing moves at the stock exchange. There are several types of graphs, like line graphs, bar graphs (OHLC – (Open, High, Low and Close), Candlestick, Three Line Break, Dot-Figure, HeikinAshi, Kagi, and many others. Each type of graph has particular characteristics, and all of them show pricing moves and development over time. Most common graphs used by the financial markets include line and bar graphs and that one known as “candlestick” graph.
This is the simplest graph that can be plotted, and it is a simplification from the bar graph. Only closing prices are considered, with no further information on moves occurred during the trading hours, which is a disadvantage of its use. Below you can find an example of line graph for a period of 3 years on Petrobras’ historical data:
The graph is intuitive and shows exactly what happened to share prices. The Y axis shows the shares pricing, while the X axis shows the dates or the elapsed time.
The bar graph is a bit more complex than the lines graph, and one of the most popular tools for technical analysis. It brings opening prices, closing prices, as well as moves, peaks and troughs. Look at the following illustration:
The illustrations reflects exactly what happened in the trading session. The vertical bar shows the maximum and the minimum prices for a period of time (one trading session in this case), represented by the top and bottom ends, respectively. The segment on the left shows the pricing level by the opening and the segment on the right, the final pricing level, when the session ends up. If closing prices were higher than those by the beginning of the session, then the segment on the right would be above that one on the left side. Otherwise, the graph appears like the one above.
The larger is the distance between the minimum and the maximum price, as the illustrations shows, the more volatile the trading session was, for the specific period of time. About starting and closing price levels, the smaller the distance between the segments is, the lower was the change in the observed period. If the distance is too large, it may indicate where the market is going. For example, if the closing price is too far from the vertical bar, it indicates that the share price rose strongly in relation to the opening price. To better memorize a bar high or low, just know this concept. If the left bar is above the right bar, then we have a low bar. If the left bar is directly below the right bar, then we have a high bar. Note the following example:
The bar graph shows the Ibovespa index for the last three years. Figure out that bars which indicate drops are in red, and those indicating peaks are in green. The larger the bars are, the more volatile are the prices for the correspondent period.
The Candles graph was firstly created in Japan, in the XVIII century, for analyzing future prices on the rice market. Still today one of the most used graphs, and like the bar graph, it uses closing and opening prices, as well as peaks and troughs. Candles come with a body and a shadow. The body is the rectangle in the graph, and corresponds to the opening and closing prices for each day. The body color indicates the results from each day. For increasing prices, or a bullish candle stick, the rectangle uses to be in white, indicate closing prices above the opening prices. For the opposite situation, the candle stick comes in black, indicating decreasing prices, or a bearish candle stick. Look the illustration below:
The candle stick on the left side shows and upward move, while the one on the right a downward pricing change. The “shadows”, or the lines on the top and the bottom of the rectangle, represent peaks and troughs on prices. Here the example of VALE5’s candle sticks for a 5-year period:
Colors don’t need to be necessarily white or black, they can have any color you judge better to represent the price moves. As mentioned, whites represent increasing prices here and blacks shrinking prices. The longer is the candle body, the more intense is the buying or selling pressure, as the illustration shows:
White and long bars explicit a strong buying pressure, and the longer is the body, the more distant will be the closing and the opening prices. Although that can show an upward trend, candles like these use to indicate turning points or sustaining levels. Candles have long black and shows us a selling pressure, and the longer the body, the farther the opening price is the closing price, and may also indicate a change in trend or resistance.
On the other hand, short candles use to indicate few changes on prices and also a consolidation trend, as the illustration shows: