A bar chart is a graph characterized by a vertical bar and it’s used by technical analysts to learn more about trends. In trading, a single bar is used to represent a single day of trading. As one of the most popular chart type aside from candlesticks, it represents price activity within a given period of time.
As a result, traders and investors use this chart type to spot trends and patterns. What you need to know is that a bar chart is similar to the candlestick. The only difference is that the body of a bar chart is not filled like that of a candlestick.
As the western version of the Japanese candlestick, they help investors and traders to observe the contraction and expansion of different price ranges.
How to read a bar chart
As one of the most popular trading chart type, a bar chart provides a lot of information to technical analysts. As a result, it allows traders and investors to come up with well thought out trading strategies designed to take advantage of the market allowing traders and investors to profit from different securities.
To better understand a bar chart, you need to learn its different parts.
- High – This is located at the peak of single bar. It represents the highest price of the day or for the time period you are using.
- Open – This is the first price where a security first trades and it happens only when the stock exchange opens for trading. This is represented by a horizontal bar close to the foot of the vertical bar.
- Low – As the lowest price traded for the day, it is located at the foot of the vertical bar.
- Close – As the last price traded for the day, it is represented by a horizontal bar projecting to the right ad positioned close to the top/peak. During this time, traders are supposed to exit a trade or complete transactions before the market closes.
- Direction – The bar chart does indicate direction and this is represented by the opening and closing feet. What you need to know is that if the opening foot is above the closing foot, it indicates an upward progress. When the closing foot is below the opening foot, this indicates that the price has moved downwards.
- Range – This is represented by the location of both the top and bottom of the vertical bar. The value of Range is calculated by subtracting the low from high.
A bar chart belongs to the OHLC charts or Open-High-Low-Close chart types and as such, it is formed through the connection of a series of price points. As a result, the chart is plotted on both X and Y axis. The X axis represents time which is plotted in terms of days while the Y axis represents price.
Types of bars
There are four types of bars. First and foremost, you have the up day or up bar. This is represented by the high and low of a bar being higher than that of the previous bar. Secondly, we have the down day. This is represented by the high and low of the previous bar being higher than the current bar.
Thirdly, we have inside day. This is represented by the high and low of a bar having a shorter range than the previous bar. Lastly, we have outside day. This is represented by the previous bar having a shorter range than the current bar.
While it takes a little patience to learn how to read a bar chart, once you learn the basics you will have a better understanding of how to read the price action for that time period.