Introduction To Charts & Bar Styles
In this guide, we will explain the different bar styles that you can use to technically analyze the finencial markets. Many styles and techniques have been developed over the years but here at AlgoStorm, we recommend the Japanese Candlestick charts for technical analysis.
This guide only covers the most popular bar styles. It is not a comprehensive guide of every available bar style. However, the ones discussed here are the most important ones and the mostly used ones worldwide.
They are as follows:
- Line Charts.
- Candlestick Charts.
- Bar Charts.
- Range Bar Charts.
- Heikin Ashi Charts.
- Renko Charts.
- Kagi Charts.
- Point & Figure Charts.
What Are Line Charts?
A line chart is a graphical representation of an asset’s historical price action that connects a series of data points with a continuous line. This is the most basic type of chart used in finance, and it typically only depicts a security’s closing prices over time. Line charts can be used for any timeframe, but they most often make use of day-to-day price changes.
Important Points To Remember:
- A line chart is a type of chart that displays information as a series of data points connected by straight line segments.
- A line chart is a way of visually representing an asset’s price history using a single, continuous line.
- A line chart is easy to understand and simple in form, typically only depicting only changes in an asset’s closing price over time.
- Because line charts usually only show closing prices, they reduce noise from less critical times in the trading day, such as the open, high, and low prices.
- Because of its simplicity, however, traders looking to identify patterns or trends may opt for chart types with more information, such as a candlestick.
Understanding Line Charts
A line chart gives traders a clear visualization of where the price of a security has traveled over a given time period. Because line charts usually only show closing prices, they reduce noise from less critical times in the trading day, such as the open, high, and low prices. Line charts are popular with investors and traders because closing prices are a very commonly viewed piece of data related to a security.
Advantages and Disadvantages of Using Line Charts
Traders can be overwhelmed with too much information when analyzing a security’s chart. The trading term “paralysis by analysis” is used to describe this phenomenon. Using charts that show a plethora of price information and indicators can give multiple signals that lead to confusion and complicate trading decisions.
However, using a line chart helps traders clearly identify key support and resistance levels, trends, and recognizable chart patterns.
Line charts are also ideal for beginner traders to use due to their simplicity. They help to teach basic chart reading skills before learning more advanced techniques, such as reading Japanese candlestick patterns or learning the basics of point and figure charts. Volume and moving averages can easily be applied to a line chart as traders continue their learning journey.
On the other hand, line charts may not provide enough price information for some traders to monitor their trading strategies. Some strategies require prices derived from the open, high, and low.
Also, traders who use more information than just the close do not have enough information to back-test their trading strategy by using a simple line chart. Candlestick charts, which contain an asset’s daily open, close, high, and low prices all in the same unit may be more useful in these cases.
Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. In the 1700s, a Japanese man named Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders.
Candlesticks show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.
Note: This is the bar style that our team at AlgoStorm.com uses.
Important Points To Remember:
- Candlestick charts are used by traders to determine possible price movement based on past patterns.
- Candlesticks are useful when trading as they show four price points (open, close, high, and low) throughout the period of time the trader specifies.
- Many algorithms are based on the same price information shown in candlestick charts.
- Trading is often dictated by emotion, which can be read in candlestick charts.
Just like a bar chart, a daily candlestick shows the market’s open, high, low, and close price for the day. The candlestick has a wide part, which is called the "real body."
This real body represents the price range between the open and close of that day’s trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.
Traders can alter these colors in their trading platform. Here at AlgoStorm.com, we use cold pale blue and red as our main colors instead of green and red.
What Are Bar Charts?
Bar charts consist of multiple price bars, with each bar illustrating how the price of an asset or security moved over a specified time period. Each bar typically shows open, high, low, and closing (OHLC) prices, although this may be adjusted to show only the high, low, and close (HLC).
Important Points To Remember:
- A bar chart visually depicts the open, high, low, and close prices of an asset or security over a specified period of time.
- The vertical line on a price bar represents the high and low prices for the period.
- The left and right horizontal lines on each price bar represent the open and closing prices.
- Bar charts can be colored coded where if the close is above the open it may be colored black or green, and if the close is below the open the bar may be colored red.
Understanding Bar Charts
A bar chart is a collection of price bars, with each bar showing price movements for a given period. Each bar has a vertical line that shows the highest and lowest price reached during the period. The opening price is marked by a small horizontal line on the left of the vertical line, and the closing price is marked by a small horizontal line on the right of the vertical line.
If the closing price is above the open price, the bar may be colored black or green. Conversely, if the close is below the open, the price dropped during that period, so it could be colored red. Color coding the bars helps traders see trends and price movements more clearly. Color coding is available as an option in most charting platforms.
Technical analysts use bar charts—or other chart types such as candlestick or line charts—to monitor price action, which aids in trading decisions. Bar charts allow traders to analyze trends, spot potential trend reversals, and monitor volatility and price movements.
Traders and investors decide which period they want to analyze. A 1-minute bar chart, which shows a new price bar each minute, would be useful for a day trader but not an investor. A weekly bar chart, which shows a new bar for each week of price movement, may be appropriate for a long-term investor, but not so much for a day trader.
Interpreting Bar Charts
As a bar chart shows the open, high, low, and closing prices for each period, there is a lot of information that traders and investors can utilize.
Long vertical bars show there was a big price difference between the high and low of the period. That means volatility increased during that period. When a bar has very small vertical bars, it means there was little volatility.
If there is a large distance between the open and close it means the price made a significant move. If the close is far above the open, it shows buyers were very active during the period, which may indicate more buying in future periods is forthcoming. If the close is very near the open, it shows there was not a lot of conviction in the price movement during the period.
The location of the close relative to the high and low may also provide valuable information. If an asset rallied higher during the period but the close was well below the high, it signals that toward the end of the period sellers came in. That is less bullish than if the asset closed near its high for the period.
If the bar chart is colored coded based on whether the price rises or falls during the period, the colors can provide information at a glance. An overall uptrend is typically represented by more green/black bars. Downtrends, on the other hand, are typically represented by more red bars.
Bar Charts vs. Candlestick Charts
Bar charts are very similar to Japanese candlestick charts. The two chart types show the same information but in different ways.
A bar chart is composed of a vertical line, with small horizontal lines on the left and right that show the open and close. Candlesticks also have a vertical line showing the high and low of the period (called a shadow or wick), but the difference between the open and close is represented by a thicker portion called a real body. The body is shaded in or colored red if the close is below the open and shaded in or colored white or green if the close is above the open. While the information is the same, the visual look of the two chart types is different.
Range Bar Charts
What Are Range Bars?
Nicolellis range bars were developed in the mid-1990s by Vicente Nicolellis, a Brazilian trader and broker who spent over a decade running a trading desk in Sao Paulo. The local markets at the time were very volatile, and Nicolellis became interested in developing a way to use the volatility to his advantage. He believed price movement was paramount to understanding (and making profits from) volatility. So, Nicolellis developed the idea of range bars, which consider only price, thereby eliminating time from the equation.
Important Points To Remember:
- Range-bar charts are different from time-based charts because each new bar in a range bar is based on price movement rather than units of time, like minutes, hours, days, or weeks.
- Brazilian trader Vicente Nicolellis created range-bar charts in the mid-1990s in order to better understand the volatile markets at that time.
- In volatile markets, many bars will print on a range bar chart, but range bars will be fewer in slow markets.
- The ideal settings for range-bar charts depend on the security, price, and amount of volatility.
Calculating Range Bars
Nicolellis found that bars based on price only, and not time or other data, provided a new way of viewing and utilizing volatility of financial markets. Most traders and investors are familiar with bar charts based on time. For instance, a 30-minute chart shows the price activity for each 30-minute time period during a trading day and each bar on a daily chart shows the activity for one trading day.
Time-based charts will always print the same number of bars during each trading session, trading week, or trading year, regardless of volatility, volume, or any other factor.
Range bar charts, on the other hand, can have any number of bars printing during a trading session: during times of higher volatility, more bars will appear on the chart, but during periods of lower volatility, fewer bars will print. The number of range bars created during a trading session will also depend on the instrument being charted and the specified price movement for each range bar.
Rules Of Range Bars
- Each range bar must have a high/low range that equals the specified range.
- Each range bar must open outside the high/low range of the previous bar.
- Each range bar must close at either its high or its low.
Settings for Range Bars
Specifying the degree of price movement for creating a range bar is not a one-size-fits-all process. Different trading instruments move in a variety of ways.
It should be noted that, while it is generally true that high-priced trading instruments can have a greater average daily price range than those that are lower priced, instruments that trade at roughly the same price can have very different levels of volatility, as well. While we could apply the same range-bar settings across the board, it is more helpful to determine an appropriate range setting for each trading instrument.
One method for establishing suitable settings is to consider the trading instrument’s average daily range. This can be accomplished through observation or by utilizing indicators such as average true range (ATR) on a daily chart interval. Once the average daily range has been determined, a percentage of that range could be used to establish the desired price range for a range bar chart.
Another consideration is the trader’s style. Short-term traders may be more interested in looking at smaller price movements and, therefore, may be inclined to have a smaller range-bar setting. Longer-term traders and investors may require range bar settings that are based on larger price moves.
Trading with Range Bars
Range bars can help traders view price in a "consolidated" form. Much of the noise that occurs when prices bounce back and forth between a narrow range can be reduced to a single bar or two. This is because a new bar will not print until the full specified price range has been fulfilled, and helps traders distinguish what is actually happening to price.
Because range-bar charts eliminate much of the noise, they are very useful charts on which to draw trendlines. Areas of support and resistance can be emphasized through the application of horizontal trendlines; trending periods can be highlighted through the use of up-trendlines and down-trendlines.
Interpreting Volatility with Range Bars
Volatility refers to the degree of price movement in a trading instrument. As markets trade in a narrow range, fewer range bars will print, reflecting decreased volatility. As price begins to break out of a trading range with an increase in volatility, more range bars will print.
In order for range bars to become meaningful as a measure of volatility, a trader must spend time observing a particular trading instrument with a specific range-bar setting applied.
Through observation, a trader can notice the subtle changes in the timing of the bars and the frequency in which they print. The faster the bars print, the greater the price volatility; the slower the bars print, the lower the price volatility. Periods of increased volatility often signify trading opportunities as a new trend may be starting.
While not a technical indicator, range bars can be used to identify trends and to interpret volatility. Since range bars take only price into consideration, and not time or other factors, they provide traders with a unique view of price activity.
Spending time observing range bars in action is the best way to establish the most useful settings for a particular trading instrument and trading style, and to determine how to effectively apply them to a trading system.
Heikin Ashi Charts
What Is Heikin Ashi?
The Heikin-Ashi technique averages price data to create a Japanese candlestick chart that filters out market noise.
Heikin-Ashi charts, developed by Munehisa Homma in the 1700s, share some characteristics with standard candlestick charts but differ based on the values used to create each candle. Instead of using the open, high, low, and close like standard candlestick charts, the Heikin-Ashi technique uses a modified formula based on two-period averages. This gives the chart a smoother appearance, making it easier to spots trends and reversals, but also obscures gaps and some price data.
Important Points To Remember:
- Heikin-Ashi is a candlestick pattern technique that aims to reduce some of the market noise, creating a chart that highlights trend direction better than typical candlestick charts.
- The downside to Heikin-Ashi is that some price data is lost with averaging, which could affect risk.
- Long down candles with little upper shadow represent strong selling pressure, while long up candles with small or no lower shadows signal strong buying pressure.
How to Calculate Heikin-Ashi
- Open: (Open (previous candle) + Close (previous candle)) / 2
- Close: (Open + Low + Close + High) / 4
- High: The same of the actual candle
- Low: The same of the actual candle
What Does Heikin-Ashi Tell You?
The Heikin-Ashi technique is used by technical traders to identify a given trend more easily. Hollow white (or green) candles with no lower shadows are used to signal a strong uptrend, while filled black (or red) candles with no upper shadow are used to identify a strong downtrend.
Reversal candlesticks using the Heikin-Ashi technique are similar to traditional candlestick reversal patterns; they have small bodies and long upper and lower shadows. There are no gaps on a Heikin-Ashi chart as the current candle is calculated using information from the previous candle.
Because the Heikin-Ashi technique smooths price information over two periods, it makes trends, price patterns, and reversal points easier to spot. Candles on a traditional candlestick chart frequently change from up to down, which can make them difficult to interpret. Heikin-Ashi charts typically have more consecutive colored candles, helping traders to identify past price movements easily.
The Heikin-Ashi technique reduces false trading signals in sideways and choppy markets to help traders avoid placing trades during these times. For example, instead of getting two false reversal candles before a trend commences, a trader who uses the Heikin-Ashi technique is likely only to receive the valid signal.
Limitations of the Heikin-Ashi Technique
Since the Heikin-Ashi technique uses price information from two periods, a trade setup takes longer to develop. Usually, this is not an issue for swing traders who have time to let their trades play out. However, day traders who need to exploit quick price moves may find Heikin-Ashi charts are not responsive enough to be useful.
The averaged data also obscures important price information. Daily closing prices are considered important by many traders, yet the actual daily closing price is not seen on a Heikin-Ashi chart. The trader only sees the averaged HA closing value. In order to control risk, it is important the trader is aware of the actual price, and not just the HA averaged values.
Another important element in technical analysis that is missing from Heikin-Ashi charts is price gaps. Many traders use gaps for analyzing price momentum, setting stop-loss levels, or triggering entries.
What is a Renko Chart?
A Renko chart is a type of chart, developed by the Japanese, that is built using price movement rather than both price and standardized time intervals like most charts are. It is thought to be named after the Japanese word for bricks, "renga," since the chart looks like a series of bricks.
A new brick is created when the price moves a specified price amount, and each block is positioned at a 45-degree angle (up or down) to the prior brick. An up brick is typically colored white or green, while a down brick is typically colored black or red.
Important Points To Remember:
- Renko charts are composed of bricks that are created at 45-degree angles to one another. Consecutive bricks do not occur beside each other.
- A brick can be any price size, such a $0.10, $0.50, $5, and so on. This is called the box size. Box size can also be based on the Average True Range (ATR).
- Renko charts have a time axis, but the time scale is not fixed. Some bricks may take longer to form than others, depending on how long it takes the price to move the required box size.
- Renko charts filter out noise and help traders to more clearly see the trend, since all movements that are smaller than the box size are filtered out.
- Renko charts typically only use closing prices based on the chart time frame chosen. For example, if using a weekly time frame, then weekly closing prices will be used to construct the bricks.
What Does a Renko Chart Tell You?
Renko charts are designed to filter out minor price movements to make it easier for traders to focus on important trends. While this makes trends much easier to spot, the downside is that some price information is lost due to simple brick construction of Renko charts.
The first step in building a Renko chart is selecting a box size that represents the magnitude of price movement. A Renko chart is then constructed by placing a brick in the next column once the price has surpassed the top or bottom of the previous brick by the box size amount.
While a fixed box size is common, ATR is also used. ATR is a measure of volatility, and therefore it fluctuates over time. Renko charts based on ATR will use the fluctuating ATR value as the box size.
Renko charts show a time axis, but the time intervals are not fixed. One brick to could take months to form, while several bricks may form within a day. This varies from candlestick or bar charts where a new candle/bar forms at specific time intervals.
Increasing or decreasing the box size will affect the "smoothness" of the chart. Decreasing the box size will create more swings, but will also highlight possible price reversals earlier. A larger box size will reduce the number of swings and noise but will be slower to signal a price reversal.
Renko charts are effective in identifying support and resistance levels since there is a lot less noise than a candlestick chart. When a strong trend forms, Renko traders may be able to ride that trend for a long time before even one brick in the opposite direction forms.
Trading signals are typically generated when the direction of the trend changes and the bricks alternate colors. For example, a trader might sell the asset when a red box appears after a series of climbing white boxes. Similarly, if the overall trend is up (lots of white/green boxes) a trader may enter a long position when a white brick occurs after one or two red boxes (a pullback).
Limitations of Using Renko Charts
Renko charts don’t show as much detail as candlestick or bar charts given their lack of reliance on time. A stock that has been ranging for a long period of time may be represented with a single box, which doesn’t convey everything that went on during that time. This may be beneficial for some traders, but not for others.
Highs and lows are also ignored, only closing prices are used. This leaves out a lot of price data since high and low prices can vary greatly from closing prices. The use of only closing prices will reduce the amount of noise, but it also means the price could break significantly before a new box(es) forms and alerts the trader. By then it could be too late to get out with a manageable loss. Therefore, when using Renko charts, traders often still use stop loss orders at fixed prices, and won’t rely solely on Renko signals.
Since this type of chart was designed to follow the general price trend of an asset, there can often be false signals where the color of the bricks changes too early, producing a whipsaw effect. This is why it’s important to use Renko charts in conjunction with other forms of technical analysis.
What Are Kagi Charts?
The Kagi chart is a specialized type of technical analysis developed in Japan in the 1870s. It uses a series of vertical lines to illustrate general levels of supply and demand for certain assets, including the price movement of rice, a core Japanese agricultural product. Thick lines are drawn when the price of the underlying asset breaks above the previous high price and is interpreted as an increase in demand for the asset. Thin lines are used to represent increased supply when the price falls below the previous low.
Important Points To Remember:
- Kagi charts change direction when there is a price reversal of a specified amount, or more.
- The chart continues to move in that direction until there is price reversal of the specified amount in the other direction.
- When the price moves above the prior Kagi high the line turns thick (or green) and when the price drops below the prior Kagi low the line turns thin (or red). The line stays thick or thin until the opposite signal occurs.
- The changes in direction, changes in line thickness, as well as other patterns can generate buy and sell signals.
What Does a Kagi Chart Tell You?
On the Kagi chart, an entry signal is triggered when the vertical line changes from thin to thick and is not reversed until the thick line changes back to thin. Like any other chart, these signals should be filtered based on other fundamental or technical criteria, as simply buying or selling every time time Kagi chart switches from thick to thin could prove costly and unprofitable.
The line turns thick when a new high is made (if the line was thin). The line stays thick as long as a new low isn’t made. The line turns thin when a new low is made, and stays that way until a new high is made (turns thick).
The Kagi chart will move up and down as the price moves by the reversal amount, or more.
These charts are independent of time and only change direction once a predefined reversal amount is reached. The reversal amount is discussed below.
Kagi charts, having no regard for time, have the advantage of reducing noise. Noise is a particular drawback of traditional candlestick charting methods. Because a change in price direction occurs only after a specific threshold is reached, some traders may find Kagi charts useful in terms of isolating the trend and viewing direction more clearly.
Depending on the trading or charting platform used, the Kagi chart line may not be thin or thick, but rather colored, such as red and green. The color changes signal a drop below a recent high or low.
Kagi Chart Reversal Amount
A Kagi chart will reverse direction when the price has moved the other direction by a specified amount (or more). The reversal amount doesn’t need to be a fixed amount. It can also be based on Average True Range (ATR), which means the reversal amount will change as volatility changes.
When the Kagi chart reverses, it draws a horizontal line at the low or high price (close, high or low, depending on which is selected) and then reverses. It will continues to move vertically until there is a reversal.
These are directional changes on the chart. The lines changing color or switching from thick to thin highlights when a prior Kagi chart high or low is breached.
The Limitations of Using Kagi Charts
Kagi charts are sensitive to their settings, and with poor settings they can be as noisy as other charting methods. Once a "good" setting is found for a particular asset, that setting may not work well on another asset. The trader therefore may need to find Kagi settings that work for each asset traded.
For some traders the trend may be harder to identify with the Kagi charts, with the line thickness (or color) changing as well as the chart itself moving up and down in vertical lines.
While trade signals with Kagi charts will have some similarities to other chart types, like candlesticks, Kagi charts have unique features which may require additional study to take advantage of.
Point & Figure Charts
What Are Point-and-Figure (P&F) Charts?
A point-and-figure chart plots price movements for stocks, bonds, commodities, or futures without taking into consideration the passage of time.
Contrary to some other types of charts, like candlesticks, which mark the degree of an asset’s movement over set time periods, P&F charts utilize columns consisting of stacked X’s or O’s, each of which represents a set amount of price movement. The X’s illustrate rising prices, while O’s represent a falling price.
Technical analysts still utilize concepts such as support and resistance, as well as other patterns, when viewing P&F charts. Some argue that support and resistance levels, as well as breakouts, are more clearly defined on a P&F chart since it filters out tiny price movements and is less susceptible to false breakouts.
Important Points To Remember:
- An X is created when the price moves higher by a set amount, called the box size. An O is created when the price drops the box size amount.
- X’s and O’s stack on top of each other, respectively, and will often form a series of X’s or O’s.
- The box size is set based on the asset’s price and the investor’s preference.
- The formation of a new column of X’s or O’s occurs when the price moves contrary to its current trend, and does so by more than the reversal amount.
How to Calculate Point-and-Figure (P&F) Charts
Point-and-figure charts don’t require calculation, but they do require at least two variables to be set.
One variable is the box size. The box size can be a specific dollar amount, such as $1, a percentage, such as 3% of the current price, or it can be based on average true range (ATR) which means the box size will fluctuate based on volatility.
The reversal amount also needs to be set. The reversal amount is typically three times the box size.
An optional variable is whether to use high and low prices for the underlying asset or to use closing prices. Using high and low prices will mean the creation of more X’s and O’s, while using only closing prices (less movement being calculated compared to high and lows) will mean fewer X’s and O’s are created.
What Does a Point-and-Figure (P&F) Chart Tell You?
Point-and-figure charts often provide technical analysts with different trade and trend signals, relative to traditional candlestick or bar charts. While some analysts rely more heavily on the point-and-figure charts, others use these charts to confirm signals provided by traditional charts in an effort to avoid false breakouts.
The key to point-and-figure charting is the box size, or the amount of price movement that determines whether a new X or O is added to the chart.
Notably, the line of X’s continues in the same column, provided that the price continues to rise and doesn’t breach a predetermined reversal amount, at which point, a new column of O’s begins. The same is true for a column of O’s in a declining market; the column continues until the stock reaches the reversal amount, at which point a new column of X’s begins.
A reversal occurs when the price is no longer moving enough to put another X or O in the current X or O column, and then the price moves at least three box sizes (if this is the chosen reversal amount) in the opposite direction. When a reversal occurs, several X’s or O’s will be drawn at the same time. For example, following a price rise or column of X’s, if a reversal occurs and the reversal amount is three box sizes, when the reversal occurs three O’s will be drawn starting one spot below the highest X.
Traders utilize P&F charts in similar ways to other charts. Traders still watch for support and resistance levels. Breakouts can signal major trend changes. Depending on the box size, the columns themselves can represent significant trends, and when the column changes (from O to X, or X to O) that may signal a significant trend reversal or pullback.
Limitations of Using Point-and-Figure (P&F) Charts
P&F charts can be slow to react to price changes. A breakout, for example, must move the box amount in order to signal a breakout occurred. This may benefit some traders as it may reduce false breakout signals, but the price has already moved the box amount (or more) beyond the breakout point. For some traders, getting the signal after the price has already moved that much may not be effective.
Also, while P&F charts may help reduce the number of false breakouts, false breakouts still occur. What appears to be a breakout may still be reversed a short time later.
P&F charts are good at keeping traders in strong trends, as a lot of small counter-trend movements are filtered out. Yet when a reversal occurs it can significantly erase profits or result in big losses. Because the reversal amount is typically so large, if a trader is only using P&F charts they won’t see the reversal until the price has moved significantly against them.
When using P&F charts, it is recommended to also watch the actual price of the asset so that risk can be monitored in real time. This can be done by monitoring a candlestick or open-high-low-close (OHLC) chart.
Which Bar Style To Choose?
Choosing the right style really depends on you as a trader and what kind of strategy are you following. There is no right or wrong style. It is also good to note that it is vital to learn how to read any type of chart regadless of the bar style that you end up using.
Our team only uses the Japanese Candlestick charts. It is also the most popular one.