Technical Analysis

Technical analysis is the study of security prices to identify trends, patterns, and supply and demand levels on charts to formulate assumptions for future price action.
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Technical analysis uses indicators based on price and volume to make investment decisions, often based on probabilities and risk-reward trade-offs. Technical analysis assesses supply and demand, trends, sentiment, momentum, patterns, cycles, and other analysis techniques for security selection decisions and directional biases.

Price Charting

Price charts display a series of prices over a defined period of time. Price charts come in many forms. Line, bar, and candlestick charts are the most commonly used. Price is plotted on the y-axis, and time is plotted on the x-axis of the chart.

Price charts can show prices for any specified period of time, including intraday, daily, weekly, monthly, or annually. The type of chart used depends on the desired use for the price data and trading strategy.

For example, long-term economic trend data is typically depicted with a line chart using a monthly or yearly time frame.

Bar charts are perhaps the most commonly used chart type, while candlestick charts can have unique trading patterns based on the candle’s size and coloring.

Each type of chart has an intended use and represents price data in unique, meaningful ways.

Line Charts

Line charts plot the closing price of a security and connect each point with a line. Line charts are a visual representation of a security’s price.

Line charts are the most basic chart type and are simple to create as only two data inputs are needed: the date and corresponding closing price value.

Line chart

Because the closing price is a primary input for many technical indicators and signals for trading strategies, other data, such as the day’s high, low, or open found in other chart types, may be unnecessary. Therefore, many investors start with line charts.

OHLC Bar Charts

OHLC bar charts illustrate the entire range for a period by indicating the opening, high, low, and closing prices on one bar.

The opening price for the period is a horizontal line pointing to the left. The closing price for the period is a horizontal line pointing to the right. The high price for the period is the top of the bar while the low price for the period is the bottom of the bar.

OHLC bar chart

Bar charts display the day’s full range and provide additional context to price movements compared to line charts. Bars provide trading setups similar to candlestick charts with patterns and combinations of bars, such as reversals, inside bars, outside bars, triangles, etc.

Candlestick Charts

Candlestick charts illustrate the entire range for a period by indicating the opening, closing, high, and low prices of a period.

The space between the opening and closing prices of the period forms the candlestick’s body. Prices above and below the opening and closing range form the candle’s wick, or shadow.

The size of the candlestick body relative to the candlestick wick is informative of the strength or weakness of price direction for the period.

Candlesticks are color-coded. In full-color charts, if the closing price is above the opening price, the candle’s body is green. If the closing price is below the opening price, the candle’s body is red. If the opening price is above the closing price, but the period’s price closes above the previous period’s close, the candle’s body is black.

Candlestick basics with description of bullish and bearish candle components

Candlestick charts may provide trading signals through patterns based on one, two, three, or more candles. Candlestick patterns are known for their intriguing names, such as three black crows, doji, and shooting star.

Logarithmic vs. Linear Price Scaling

The scaling of price charts may be varied to allow longer time periods or wider price ranges to be viewed on different scales. Charts may have logarithmic (log or semi-log) or arithmetic (linear) price scaling.

Logarithmic vs. Linear Price Scaling

The space between each point on the chart’s vertical axis is identical on an arithmetic scale. The space between each point on the chart’s vertical axis corresponds to the percentage change between the points on a logarithmic scale.

If an investor wants to measure a move in terms of price, linear scales are often used. If an investor wants to measure a move on percentage terms or if the price change has been significant over the period of time displayed, logarithmic scales are typically used.

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FAQs

What is a line chart used for?

Line charts plot the closing price of a security and connect each point with a line. Line charts are a visual representation of a security’s price.

Line charts are the most basic chart type and are simple to create as only two data inputs are needed: the date and corresponding closing price value.

Because the closing price is a primary input for many technical indicators and signals for trading strategies, other data, such as the day’s high, low, or open found in other chart types, may be unnecessary. Therefore, many investors start with line charts. 

How to make a line chart in Excel?

Line charts plot the closing price of a security and connect each point with a line. Line charts are a visual representation of a security’s price.

Line charts are the most basic chart type and are simple to create as only two data inputs are needed: the date and corresponding closing price value.

Input the data into Excel and select the rows and columns that contain the closing prices and dates. Excel includes multiple options for charts, including line, bar, and candlestick charts, and offers tutorials on how to create specific charts.

Most trading platforms and online brokers offer multiple price charts as well.

How to make a bar chart in excel?

Bar charts illustrate the entire range for a period by indicating the opening, closing, high, and low prices on one bar.

The opening price for the period is a horizontal line pointing to the left. The closing price for the period is a horizontal line pointing to the right. The high price for the period is the top of the bar while the low price for the period is the bottom of the bar. Bar charts display the day’s full range and provide additional context to price movements compared to line charts.

Input the opening, closing, high, and low price data, and the date range into Excel and select the rows and columns that contain the prices and dates. Excel includes multiple options for charts, including line, bar, and candlestick charts, and offers tutorials on creating specific charts.

Most trading platforms and online brokers offer multiple price charts as well.

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