Chapter 5
IN THIS CHAPTER
Exploring the basics of bar charts
Creating a bar chart
Using a bar chart
Looking at the price movement of a stock and trying to glean information from it can seem overwhelming for first-time users. In this chapter, we explore bar charts, which are one of the simplest forms used to view daily price readings.
A bar chart is a chart type that is used for displaying price. When it is displayed in black, the price bars used today look a lot like the price charts from the business section of the newspaper. The following sections go over the structure of a price bar and different kinds of bar charts.
These four components make up a price bar, shown in Figure 5-1, and the name is abbreviated to a chart style of OHLC Bar (OHLC is an acronym for open-high-low-close).
When placed day after day, price bars form a picture but do not have the pronounced look of candlesticks (see Chapter 4). You can see the four components of an OHLC bar chart in Figure 5-2.
Because the individual price bars look the same, your attention is not drawn to them, unlike the big down candles found on the candlestick chart type. In the Tesla example shown in Figure 5-2, your eye tends to see the trend more than the individual bars.
Another type of bar chart, which is less common, ignores the open on each bar and just uses the high-low-close (HLC) information. In the construction of the price bar, it places a line across the bar rather than just on the right-hand side. The format for this type of price bar is shown in Figure 5-3.
The price bar represents the price movement and the closing price without the opening price information. You can see an example of this type of chart in Figure 5-4.
The bar chart is a common type of chart display. Using the settings panel under the chart, users can change the display to show the variation in trading ranges. You can see the settings panel on StockCharts.com
in Figure 5-5.
Under Chart Attributes, select the OHLC Bars option from the Type drop-down list. You will need to click Update to get the bars on the display. Note: For clarity in the figures in this book, we have used OHLC Bars (thick) so the bars are wider and stand out more.
It is also possible to make the chart in color. Selecting the same color for both up and down movement is one setting. If you use a different color for up (blue) and down (orange), the chart will compare the current price to the previous day’s close, and the color of the bar will be based on your color choice. In Figure 5-5, the type is OHLC Bars (thick); as you move across that line in the settings, you see the size is 1024, the color scheme is Murphy, the Up color is set for blue, and the down color is set for orange. It is easier for the eye to quickly pick out up or down days by using two different colors. (We discuss chart attributes in greater detail in Chapter 3.)
OHLC bars are nice to work with. The down price bars still draw attention when colored differently, but they do not have the ominous look of filled candles on a candlestick chart (see Chapter 4). Coauthor Greg uses bar charts for most of his work. He finds they draw his attention to the overall highs and lows, and he can add more days of information without losing clarity. They also draw attention to breaks in the price pattern.
Bar charts are less focused on the intraday price movements but still offer some level of detail for traders looking for intraday movements. Gaps, trading ranges, and market extremes are easy to see on bar charts, as you see in the following sections.
The use of the word gap when visually reviewing a chart refers to the difference between the previous day’s close and the morning open. In Figure 5-5, for example, March 1 was a gap up as the price moved from $24.52 to $25.29, while March 20 was a gap down from $24.78 to $24.50.
Gaps are emotional places on the chart. They indicate that a new piece of information has entered the market that causes sudden buying or sudden selling. Every transaction has a buyer and a seller. In the case of a gap up, buyers are clamoring to get the stock. In the case of a gap down, sellers are clamoring to sell the stock. These imbalances from information overnight or over a weekend cause the stock to gap.
Bank of America (BAC), shown in Figure 5-5, has two interesting gaps close together in March. On March 1, BAC gapped up. On March 20, BAC gapped down to below the level from which the gap up started on March 1. This leaves an image of an island, where price looks disconnected from the rest of the chart. Everyone who bought on the flurry of news from the gap up on or after March 1 is now trapped in a losing position.
Trading ranges can be short-term from a few weeks to a few months or even longer-term for three to four years. The ranges can be huge, making it profitable to buy low and sell high within trading ranges. Bank of America in Figure 5-5 traded between $21.87 and $25.72 throughout the first part of 2017. This is not what we mean by a trading range, however. A trading range is when price oscillates up and down, trading between two price levels.
Early in 2017, the price traded sideways between $22.20 and $23.40, with one exception on January 18. The next morning it went right back up into the range. When chartists see this consolidating type of price action, they focus on where the lows for the stock are and where the highest price is. They look for three key types of signs: support, resistance, and breakout (see Figure 5-6):
The stock had three approximate levels of support at $22, $24, and $25 where buyers stepped in when the stock was pulling back. It had three levels of resistance — periods of time when the stock price stops moving up — at $23.50, $24.80, and $25.72.
In hindsight, chartists know that the intermediate high for BAC was $25.72. Following the price action, chartists watched to see whether the support levels drawn as solid lines would continue to act as support. March 15 violated support but closed above it. Then on March 17, Bank of America violated the $25 support and closed below it. This left everyone who bought above this level trapped in a losing position and starting to get nervous as they had bought after the stock had made a big move.
Then, on March 20, the stock continued lower after gapping below the March 1 breakout. Now some buyers who bought during the consolidation between $24 and $24.80 were getting uncomfortable with the stock because they had a lot of profit, and now that profit had disappeared. The next day showed the stock accelerating lower as more and more sellers tried to release the stock. It ended up finding support at $22 again after more disgruntled investors sold. Anyone who bought above $22 was not very happy.
Finally, the stock started rallying up from $22 support again, but the stock had trouble getting through $24, which was a previous support area. After April 1, the stock continued to trade between support at $22 and resistance around $24. This is how technical patterns are built from buyer/seller behavior.
In June the price made the lowest low in four months at $22.07 and then made a lower high at $24.11. Downtrends are formed by lower lows and lower highs, which also make investors nervous.
This concept of support and resistance is easy to see in Figure 5-6. The level of $24.80 is close to $25.00, so we would call the area around there a support/resistance area. The level of $24 is also a support/resistance area. $22 is a support area. We have placed a dotted line at $23.25. Even at that level, you can see how price gaps above and below between April and June.