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There are many approaches and setups in trading. And it is similar with the chart types. In the trading scene, more and more types of trading charts have emerged over the last decades. Some of them are common, others rather not. In this text you will find the 4 classics that every trader should know.
Line chart – the classic
You probably know the line chart from most financial information sites. Even today, you can still find this classic among the default settings for displaying a chart.
For example, if you go to the page of Finanztreff and call up the chart of the DAX, the first screen you will see is the following chart:
As you can see, the DAX is simply shown as a line in this chart. This means that you will only get one piece of information from this chart from the trading days – the closing price. Much trading information that other charts contain is not available here.
It can happen that on very volatile trading days the closing price is at the level of the previous day, but the daily fluctuation was several 100 points. You will not get this information in a trading chart that only shows the closing prices. So who is the line chart suitable for?
Especially equity investors or owners of investment funds have made a good choice with the line chart. Whenever the investment horizon extends well beyond several days, the fluctuations within one day are not necessary information. However, if you are a day trader or swing trader, the line chart is rather unsuitable. However, you can compensate for the disadvantage of the line chart with the bar chart.
Bar charts in trading
Unlike the line chart, the bar chart shows much more than just the closing price of the last days and months. The bar chart is often optimized in such a way that you can see at first glance which day or week was in loss or profit.
This is achieved by using a positive bar, which often has a different colour underlay than the negative bar. Usually these two states are marked with red for negative and green for positive. These characteristics of this trading chart ensure that it is used much more often in chart analysis than the line chart.
Let’s look at a bar chart
You can now see the red and green candles of the bars. Unlike the line chart, you can now also clearly see the daily fluctuations of each individual day. Now you know not only the closing price but also every point at which the DAX was traded on the respective trading day.
However, in a 6-month chart you can now see a lot of information. For this reason, many stock exchange traders adjust the time unit to a better measure for the respective period. In the next screen you can now see the bar chart with a weekly setting.
This makes the trends more visible and you can see the trading range of an entire week with the respective opening and closing price.
The Candle Chart
The same trading information as the bar chart is also contained in the so-called candle chart or candlestick chart. However, this trading chart is in fact visually different. The chart does not only consist of lines, but has a candlestick body, which gives the chart a little more “weight” in purely visual terms.
For this reason, the candlestick chart is one of the most popular charts in trading. In the following picture you can also see a 6 month chart with the weekly setting.
Unlike the bar chart, candlestick charts are often drawn with white and black candle bodies. However, in many programs you can implement your own ideas at this point. The second variant, which is often chosen, is similar to the bar chart with red and green candle bodies. However, the setting is indeed a matter of taste.
In order to strengthen the expressiveness of the charts, technical indicators are often used additionally.
All 3 charts presented here have one thing in common. They represent the market from day to day, even on days when almost nothing happens. For this reason, trend lines can be broken even when the market is not moving.
In this picture you can see a trading setup by one of our authors. The gold market did not manage to break the marked line by rising. Instead, the market has been running sideways for days and still managed to “break” this line. But is there a way to hide this factor and ignore sideways markets?
Trading with the Point & Figure Chart
The Point & Figure chart (P&F chart) solves a problem that all 3 trading charts shown above have in common. It simply hides the “time level” in order to ignore markets that are moving very little. But what does such a chart look like? Let’s take a look at a chart by the Trading-Treff author Jörg Mahnert.
At first glance it is not obvious what distinguishes this trading chart from the others. In order to understand the difference, we need to look at the construction of the P&F chart.
Excursus P&F Charts
The P&F chart does not have a time axis in the true sense of the word. Possible indications of the date are for information purposes only, but have no influence on the chart’s course. This is because the P&F chart only uses the movements of the stock market prices. The trader defines a certain distance, which the price must at least cover until a new box is to be drawn. So if the DAX moves sideways in a narrow range of 100 points for a few days and the P&F chart only draws a box after a movement of 200 points, the chart will not change. Only after a breakout at this predetermined range will another box appear in the chart.
There are also different settings for the responsiveness, which should not be an issue here.
This property of the point & figure charts allows you to analyze trend breaks better than in the charts with time levels. However, many critics doubt the possibility of achieving a yield advantage through this property.
Conclusion on the Trading Charts
As different as the charts are, the intention of creating these trading charts is clear. Every stockbroker or trader is looking for a good opportunity to achieve returns in trading. The choice of charts is probably not the most important factor for the trader’s success. Rather, one can expect that comparable to the setup, only the right chart for each trader must be found. Because also here it is true that there is not one superior chart.
For this reason you should try out a lot at the beginning of your trading career in order to find the right chart for your trading at the end of the process. Which one it will be is completely open.