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Make money with bars, candlesticks

June 15, 2009 12:38 IST

As they say, a picture is speaks a thousand words. In technical analysis, recording the history of prices and plotting is of paramount importance. There are many methods to record the movement of a share price over a fixed timeframe. But bar charts and candlestick charts are most widely used.

Charts can be used for different time dimensions -- intraday, daily, weekly and monthly, depending upon the purpose. Bar or candle charts are very easy to interpret and capture comprehensive information of the price movement as compared to line charts, which only represent the closing price.

Bar chart

A bar is a graphical representation of price movement over a given period. It is a group of bars in sequential order.

Each individual bar consists of vertical and horizontal lines. The highest point and lowest points of the vertical are the high and low prices of the underlying during that time period.

The horizontal line on left is the opening price, on the right is the closing price.

Interpreting bar charts

If today's close is higher than yesterday's close, the bar is coloured green/blue.

If today's close is lower than yesterday's close, the bar is coloured red.

A bullish bar is created when the close is higher than the previous bar. A bearish bar is generated when the close is lower.

An uptrend is a series of days where highs are mostly higher than the day before and lows are also higher. Both the higher lows and the higher closes confirm the uptrend.

A downtrend is the reverse pattern, where highs, lows, and closes are usually lower on successive down-days.

Candlestick charts

They were first used by the Japanese to trade rice in the seventeenth century. They have now been refined by the western chartists.

Candlesticks highlight the relationship between the opening and closing prices for the same candle. The height represents the range of prices traded in the period (high to low).The broad mid-section represents the opening and closing prices for the period.

If the close is higher than the open, the candlestick mid-section is empty or coloured blue/green. If the open is higher than the close, the candlestick mid-section is filled in or coloured red.

The filled portion of the candlestick is called 'the body.' The long thin lines above and below the body represent the high/low range and are called 'shadows.'

If the underlying closes higher than its opening price, a hollow/white candlestick is drawn with the bottom of the body is representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled/dark candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.

Between the open and close, as well as the high and low, which is crucial in identifying a weak trend and reversal signals that may not be apparent on a bar chart.

It is not necessary that the candle and bar have same colour for the given price movement, as the colour of the bar results from comparing current close with previous close, while that of candle results from comparing close with the open.

Hollow candlesticks indicate buying pressure, while filled candlesticks indicate selling pressure.

I use candlesticks as a default opening on my chart book. There are many interesting patterns in candlesticks, but that we will visit it later.

The writer is director and head of research, Anagram Capital.

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Vinod Sharma in Mumbai