Learn about the three basic trading chart types and their advantages: line charts, bar charts, and candlestick charts.
One of the great things about investing is that there are all sorts of ways to approach it. Different strategies and asset classes are available whether you’re a short-term trader or a long-term investor. So why limit yourself to just one way of viewing the data?
The thinkorswim® platform has a number of different options for viewing charts. They are all easily accessible by selecting the Style dropdown from the top of any chart and then clicking Chart Style. The styles range from simple to complex. Today we’ll look at three of the most popular to see how they can be used in your analysis.
Perhaps the most recognizable chart type, a line chart is basically a graph that connects closing prices over a specific time frame.
Line charts are good for getting a bird’s eye view of historical data in order to determine the prevailing trend. Because they lack detail—offering only one data point per period—line charts aren’t especially useful for short-term traders.
But line charts are great for comparing the performance between two different issues: stock versus stock, stock versus index, and so on.
Line charts present a clean, uncluttered look for comparisons, which can help you focus on the overall trends and relative strength of each issue.
Bar charts incorporate four data points into each period instead of just one. Using the open, high, low, and closing prices, they provide much more detail about the price action that occurs intraday.
A vertical line shows the highest and lowest prices achieved per period. A hatch mark on the left indicates the day’s opening price. The right hatch mark indicates the closing price. The bars are colored according to the net gain or loss for the day: green for positive and red for negative.
Bar charts are also sometimes referred to as OHLC charts (open-high-low-close).
Believed to have been developed in the 1800s (though some estimate the technique to be much older) by Japanese merchants to track the price of rice futures, candlestick charts gained traction in the U.S. in the early 1990s and are now the go-to chart type for most traders.
Each candlestick is made up of three components: the body of the “candle,” plus upper and lower tails (the “wicks”). Like the bar chart, candlesticks display the opening, high, low, and closing prices, but their slightly different presentation makes a big visual difference.
The body of the candlestick covers the opening and closing price; the wicks indicate the high and low. Like bar charts, candlesticks can be color coded to indicate direction.
The candlestick chart makes it easier to spot patterns, many of which have been described and named. Candlestick patterns may include a single candle or a group of them.
Whatever chart type you prefer, each can be customized in the thinkorswim platform by clicking Settings (the “gear” at the top of any chart) and selecting Appearance. Once there, in addition to changing the chart type, you can change the colors, backgrounds, and construction of the charts to any layout you please.