Questions about chart types come up quite often. With all the possible options available in a modern trading platform, it’s not surprising that there is plenty of confusion around this topic. Allow us to clear some of that up for you.
Chart Type vs. Chart Timeframes
It’s important first to distinguish between the type of chart being used, and the timeframe of the chart.
Chart types include things like Line, Bar, Candlestick, Renko, Kage, Point & Figure, etc. These alter the way the chart actually looks, sometimes drastically. This is because different chart types handle the data differently. In any given moment of the stock market, there are generally only 5 pieces of data to be calculate – the open, the high, the low, the close, and volume.
Line charts, are drawn from only a single point, usually the close. This gives a very easy to read chart, but it doesn’t give a very accurate picture of the way the price action actually behaves.
Bar charts contain more useful information, and contain all 4 pieces of data regarding price: The open, the high, the low, and the close. They are drawn as a vertical line from the high to the low, and then a small horizontal line to the left for the open, and the right for the close. They have been the standard in “the west” for a very long time, but personally I’ve always found them very hard to read at a glance. I have to look very closely at the bars to really understand what they’re telling me.
Candlestick charts have become very widely adopted after being invented in Japan hundreds of years ago. They are now many traders’ preferred type of chart, because they show a lot of useful information at a glance. Each moment of time – called a “candle” – displays all the price data just like a bar chart. But they are actually filled in with a color instead of just being thin lines. This means you can more easily see “inside” what the price is doing, by observing the shape of the candles, where the highs and lows are relative to the open and close, and other factors. This information is crucial for the active trader who needs to precisely pinpoint their entries and exits. Certain candle patterns also can suggest when a market is about to change directions.
Now we come to the more unusual chart types. Most of them we don’t use very often, although Renko is turning into a personal favorite of mine. These other lesser-known types of charts usually ignore time, and are instead “built” only as the price changes. It’s difficult to explain in a short blog post, so I suggest if you are curious about them you should turn to your favorite search engine for more information.
Now let’s discuss chart timeframes. This refers to the amount of time included in one bar/candle of time. Timeframes don’t really apply in this sense, to the more unusual chart types.
In a daily timeframe for example, each candle on the chart represents one full trading day. So you can see where the price opened, how high it got, how low it got, and where it closed. Change the timeframe, say to a 5 minute chart, and things might look very different! Nothing has changed with the way the chart is presenting information though, and each bar or candle now tells you the open, high, low, and close for every 5 minute period of time.
Multiple Timeframe Analysis
Probably the most important thing to understand about charts and timeframes, is that professional traders never use only one. In our flagship training program, we spend a great deal of time on multiple timeframe analysis and how you really must use a minimum of two timeframes at all times. One timeframe shows your long term trend (like a daily or weekly chart), and the other shows your short term trend (like a 30 or 5 minute chart).
By using both, you can get a full understanding of where the price is likely to head in the long term, and exactly where you should enter your trade in the short term. This is essential because if you are only looking at a single timeframe, it’s all too easy to think the trend is in one direction, when the reality is it’s in the exact opposite direction.
As the saying goes – “The trend is your friend, until it bends!”