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.
FIGURE 1: SPX LINE CHART.
A line chart is the most straightforward chart type; it connects closing prices over time. Bid, ask, and mark prices can also be used to create a line chart. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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.
FIGURE 2: USING LINE CHARTS FOR COMPARISONS.
Line charts of crude oil futures (/CL) and the S&P 500 Index (SPX) make it easy to compare relative performance. Data source: CME Group, S&P Global. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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.
FIGURE 3: SPX BAR CHART.
This bar chart of the S&P 500 (SPX) shows intraday movement, color coded to the day’s overall gain or loss. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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.
FIGURE 4: SPX CANDLESTICK CHART CLOSEUP.
Like a bar chart, this candlestick chart of the S&P 500 (SPX) displays the high and low (wicks) and the open and close (candle body). Green candles indicate an up period and red a down period. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Investors cannot directly invest in an index.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.