Different Types of Charts

Posted On 28 Jul 2014
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Chart Types

Technical analysis is the study of price action based on the premise that all the information that is currently available is already incorporated into the current price of a financial instrument. With this in mind, there are a number of technical tools that traders can use to incorporate into their overall trading strategy.

Trend lines form the basis for support and resistance levels, which can be used by traders to form trading strategies or to complement different types of trading concepts. Support and resistance levels are specific points in which price action cannot make additional advances.

Support is a specific price level in which traders are willing to purchase a financial instrument and downward price action is rejected each time the price tests the support level. Support levels can be formed by specific groups of prices, a moving average of prices, or a trend line that uses the slope of other prices to find a specific support level.

Resistance is a price level in which traders are willing to sell a financial product and upward price action is rejected. Resistance similar to support can be formed by specific groups of prices, a moving average or a trend line.

Prior to describing trend lines and specific ways these measurements can be used to assist with trading, we will first examine different types of price measurements which are used as the basis for drawing trend lines.

A line chart is a basic way to observe historical prices as a chart will display historical prices that are represented as a single point. The line chart can be used to generate trend lines which can form the basis of support and resistance.
Another data point that potentially gives traders more information is the Open, High, Low, Close chart (OHLC). This chart shows a trader the range of prices throughout a day, and relays more information than the line chart. Each unit, which can be intra-day, daily, weekly, monthly, quarterly, etc…, is a bar, the opening price is reflected as a dash on the left of the bar and the closing price is represented as a small dash on the right side of the bar. The benefit of the OHLC chart is that allow traders to draw trend lines and create support and resistance levels using high and low levels. Given that on a daily, but certainly on a weekly or monthly price bar the high or low can be substaintially different when compared to the close price used on a line chart, a trend line can be substaintially different.

Generally, trend lines a drawn from low to low or high to high to create a slope of a line, which designates support and resistance.

Another type of chart that a trader can use to generate trend lines which have support and resistance capabilities is a point and figure chart. Point and Figure charts serve a trader well when an investor wants to eliminate time as a function and just wants to concentrate specifically on the actual price movement. Point and Figure charts are excellent tools to use in an effort to capture price by price movements within the market which can assist in targeting support and resistance levels. By varying the types of outputs that can be view, charts can show many types of angles.

Support and resistance trend lines can be combined with other types of discretionary trading styles to find price levels in which traders can initiate trades or exit trades. Trend line can also used as standalone trading triggers, which can be use to initiate positions. Whether using trend lines as guidelines for trading strategies or in conjunction with other styles, this style is key to understanding market price action.

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