What does a bar chart mean for investors?

Posted on Thursday, April 25th, 2019 MarketBeat Staff

Summary - A bar chart is one of the most basic, and easy to interpret, technical indicators available to investors and traders. A bar chart is a visual reflection of price movement. Each “bar” can represent either a unit of time such as a day, hour, or minute of trading, or it can be based on a number of transactions, otherwise known as ticks.

There are two basic types of bar charts. An open-high-low-close (OHLC) bar chart provides four data points and a high-low-close (HLC) bar chart provides three.

One of the benefits of a bar chart is that it can provide useful data at a quick glance, for example:

  • The highest and lowest points on the bar mark the highest and lowest prices attained by the security over a given period of time or transactions. The longer the bar, the more volatility is associated with the security.
  • If using an OHLC chart, the short, horizontal bar to the left of the bar indicates the opening price at the beginning of the time period.
  • The short, horizontal line on the right of the bar indicates the closing price.
  • A series of bars with higher highs and higher lows indicates an upward-moving price trend. Conversely, a series of bars with lower highs and lower lows indicates a downward-moving price trend.

Traders will frequently use a volume chart in conjunction with a bar chart to help confirm investor sentiment. Candlestick charts, Renko charts, and Heikin Ashi charts are bar chart variations. Each chart helps traders identify price movement, but all put emphasis in different areas.

Introduction

For every investor, there is power in a story. For investors who practice fundamental analysis, that story may be something that is unearthed in a balance sheet or conference call. They may see signs of a new chapter being written in a leading or lagging economic indicator. For investors who practice technical analysis, one way that securities tell a story is through charts. A bar chart is one of the most common and easy-to-use charts that show a security’s price movement over a period of time, which can also be used to dictate further price movement.

In this article, we’ll take a closer look at bar charts. We’ll define what they mean for investors, the common elements that are on a bar chart, and why bar charts are important. We'll also look at how to "read" a bar chart to get the price information needed to make a successful trade. The article will close by looking at variations on a traditional bar chart and how they are similar and different. 

What does a bar chart mean for investors?

For investors, a bar chart is a price evaluation tool that serves as a visual representation of the price of a security over a period of time. Bar charts can be automatically created by most trading software programs. The default setting is commonly one trading day, but traders can adjust the time period. Day traders, for example, will typically look for a much shorter time period and may adjust the settings to reflect price movements by the hour or by the minute. In other cases, a bar chart may be based on a number of transactions (or ticks).

What does a bar chart display?

A bar chart gives investors three or four data points depending on the type of bar chart being used. The two most common types are the open-high-low-close (OHLC) bar chart and the high-low-close (HLC) bar chart.

The OHLC bar chart displays the security’s opening price as a horizontal line on the left of the bar, the highest price reached for the day is the top of the bar, the low is the bottom of the bar, and the closing price is indicated by a horizontal line on the right of the bar.

When interpreting an OHLC chart, investors will look for these technical indicators:

  1. Vertical height– This could also be called the length of the bar. A long bar represents a high amount of volatility. This makes sense because if the top of the bar is the high price and the bottom of the bar the low price, a long bar would indicate that the security traded within a wide range which reflects the volatility and/or indecision.
  2. Horizontal line position– If the opening price line is above the closing price line, it indicates that the stock finished down for the day, no matter how much upward price movement it displays. Likewise, if the opening price line is below the closing price line, it means the stock finished up for the day. Again, this is regardless of how far below the opening price the security may have gone. It’s also important to notice the distance between the horizontal lines relative to the vertical height. If the bar is long (indicating volatile trading) but the opening and closing prices are close together that may mean there is indecision. Likewise, a wide gap between the opening and closing prices will tend to indicate conviction from the market.
  3. The line color– A black line indicates a higher trend, whereas a red line indicates a lower trend. This is not necessarily a conclusive metric but can give investors a place from which to start.

The HLC bar chart is similar to the OHLC chart with the exception that it excludes the opening price indicator. HLC bars are color-coded to show the relation between closing prices. A green line shows the closing price for that bar was greater than the previous close. A red line shows the closing price was less than the previous close.

Why is a bar chart important?

A bar chart can reveal or confirm a pattern or trend by showing how much prices are contracting and expanding. In comparison to a simple line chart, a bar chart will show traders both price movement and volatility. For disciples of range trading, bar charts when used with other technical analysis tools such as Bollinger bands, support and resistance levels, and moving averages can help identify a trading range for a security or serve as a predictive model for when the security is going to have a breakout in either direction.

Traders will frequently supplement a bar chart with a volume chart. A volume chart is attached to the bottom of a bar chart, candlestick chart, or line chart and indicates trading volume. When a line is tall it is an indication of a higher trading volume. Traders usually find that a high trading volume in combination with price movement is a better confirmation of an overall trend.

Variations on a bar chart

One of the most common variations of a bar chart is known as a candlestick chart. A candlestick chart displays the same information found in an OHLC bar chart, but places emphasis in different areas. For example,

Hollow candlestick– A hollow candlestick is one where the body of the candle is not shaded. This is a bullish indicator that shows a security’s closing price was higher than its opening price.

Filled candlestick– A filled candlestick is one where the body of the candle is shaded. This is a bearish indicator that shows the security’s opening price for that period was above its closing price.

Tails- The distinctive tails (or wicks) on either end of the candlestick shows how high (the top wick) or low (the bottom wick) the security moved during the day regardless of where it opened or closed. The wicks can help investors determine the momentum or direction of a security.

The key point to remember is that a hollow or shaded candlestick by itself does not take into account whether a security is up or down for the day based on the last period’s close. In other words, it only gives the story of the price movement for that period. The biggest distinction between a candlestick chart and a bar chart is that whereas the candlestick chart emphasizes the relationship of the closing price to the opening price of the same day, a bar chart emphasizes the how the closing price of a security relates to the prior periods closing price. Some traders will also prefer the bar chart because the lack of shading makes it more “emotionally neutral”, allowing them to focus on price contraction and expansion.  When a trader sees a large shaded area on a candlestick chart, it may prompt exaggerated selling.

Another variation on a bar chart is a Renko chart which is more closely related to a candlestick chart but filters out minor price movements which is preferable for some traders. A Renko chart establishes uniform “boxes” that conform to a specified variable. For example, a box could equal a $0.50 movement in price or 5 pips if trading in the forex market. A box is created once the price equates to that variable, not before. A potential advantage of a Renko chart is that trends may be easier to spot and the overall appearance of the chart is more uniform.

A third variation on a bar chart is a Heikin Ashi chart. A Heikin Ashi chart is also closely related to a candlestick chart and for the purposes of this article can be thought of as a moving average of a candlestick chart. The Heikin Ashi formula smooths out price fluctuations creating a smooth line that is frequently overlayed on with a candlestick chart.

The bottom line on bar charts

Bar charts are considered to be one of the more basic tools used in technical analysis. Many traders consider them to be superior to a simple line chart because the bar chart provides information about price volatility over a time period. A bar chart tells a story about how a security’s price movement over a period of time.

As an example, in a weekly bar chart (assuming a normal trading week) the price of a security when trading opens on Monday will be indicated by a horizontal line that extends from the left side of the bar. Likewise, the security's closing price on the Friday of that trading week will be indicated by a horizontal line that extends from the right side of the bar. All the other trading activity that occurs during the week will be reflected by the length of the bar. The top of the bar indicates the highest price reached in that period and the bottom indicates the lowest price reached in that period.

Traders will pay attention to the relationship of the opening price to the closing price (i.e. which one is higher and by how much). They will also look at the length of the bar. A closing price that is well above an opening price for a long bar is much more indicative of an upward trend because it shows more trading conviction.

While bar charts can provide valuable information, traders will also look to other indicators such as support and resistance lines, moving averages, and Bollinger bands to clarify or confirm the existence of a trend.

A common variation on a bar chart is a candlestick chart. While the two charts seem similar, they are different in where they place their emphasis. A candlestick chart emphasizes the relationship of the closing price to the opening price of the same day, a bar chart emphasizes how the closing price of a security relates to the prior periods closing price.

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