This is the simplest chart, commonly recognized by the public and used most often in financial media. A line chart is created by connecting all the closing prices (the last trade price at the end of the day) over a certain period. These are plotted onto the chart, and a line is drawn connecting them. This is the simplest way to present prices, but as we will see later on, it is insufficient, as the information it provides is relevant only to the stock’s closing price. For a trader, it lacks the important data such as open price, intraday high price (the peak price for each day) and the intraday low price. This is information that the trader cannot be without.
The line chart is useful and most frequently used in the media. It is especially convenient for comparing the prices of several stocks in one chart, or comparing a stock and its sector index. If, for example, we wish to check a stock’s Apple, Inc. ($AAPL) chart and compare the AAPL behavior to the hi-tech sector stocks, a line chart makes the job easier and allows determining whether a specific stock is stronger or weaker than its sector.
AAPL – 6-Month Line Chart
A nice chart, but completely useless to the trader. I use this kind of chart only when I write articles for newspapers or when television program producers request a simple chart prior to going on air that viewers can understand. You’ve seen it, you’ve made this chart’s acquaintance, and now you should forget it altogether.
Point and Figure Chart
The X and O chart is a very old method first written about in 1898. Its popularity rose in the 1940s with the publication of A. W. Cohen’s 1947 guidebook on point and figure stock market timing. By contrast with other price presentation methods where price is dependent on time, the point and figure method marks a rising price as X and a dropping price as O. This method chiefly serves long-term investors, since it presents prices over just one timeframe (for example, the closing prices of a period of trading days). Therefore it sits out intraday trading fluctuations, based on the premise that intraday changes are no more than distracting noises that cause the investor to implement unnecessary actions. Here is an example of a point and figure chart:
If you really want to anger me, read Cohen’s 1947 book, which can be ordered online, and try to use this method on intraday trading. There’s a good chance that instead of making money, you'll end up in tears. If you're interested in long-term investment, there might be something to gain from reading the book, but long term does not interest me and is not the field we’re dealing with here, so it will not be discussed further.
Now we’re moving up a level! Unlike the line chart, the bar chart displays a good amount of useful information and is the most common chart in use by investors. Note that I used the term “investors” and not “traders.” On a bar chart, every vertical bar represents price behavior for a specific timeframe, as follows: the uppermost extreme of the vertical bar indicates the highest price for the specific time unit (HIGH), and the bottom point indicates the lowest price (LOW). The small horizontal mark on the left shows the start price (OPEN) and the horizontal on the right shows the (CLOSE) price.
Let’s say that the bar chart above indicates price changes of a stock over one day: its opening, highest, lowest, and closing price for one day. Because the closing price is higher than the opening price, we understand that we are looking at a chart showing a day in which the price rose.
How do you think a chart showing an overall drop in price would look? This is how:
A day in which no change occurred would look like this:
AAPL Chart for 16 Trading Days
 shows the stock price on July 29 starting at its high (peak), dropping, then ending slightly above the low
 shows the AAPL price on July 7 opening slightly above its lowest point, dropping, then ending at a high
 shows AAPL on July 12 showing no change. The open and closing prices are identical.
A bar can indicate any length of time, from a single day as in the chart above, to a week, a month, and of course much shorter intraday trading periods from five minutes, fifteen, a half hour or full hour. Intraday traders will choose bar charts illustrating from two to thirty minutes. By contrast, an investor wanting to examine a stock’s long-term behavior will likely choose bars showing daily or weekly periods.
Note the disparity between the open and closing prices on the AAPL bar chart shown above. Note also that from one day to the next, the opening price is different from the closing price of the previous day; for example, on the day marked  you can see that the opening price is lower than the closing price of the previous day.
How is that possible? We call this phenomenon the “price gap,” or more commonly just “gap.” It is well known and important to traders, and will be discussed further. Note that one of the disadvantages of the line chart, unlike the bar chart, is that it does not contain this information!
Why don’t traders use the bar chart? On one hand, it is clear and detailed; on the other hand, it is difficult to read. The small horizontals on the left and right eventually drove me crazy, and I'm sure they speed up that inevitable day when you'll visit the optician for reading glasses (I'm not there yet…). Bar charts are generally for older investors who are not willing to learn “new tricks.” Bar charts just aren’t “cool” enough for young folk like me.
To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer."
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