Bar Chart (OHLC Chart) Basics :-
Bar Chart (OHLC Chart) Basics
The bar chart or OHLC (Open, High, Low, Close) chart
is a way to summarize price movement during a set period of time. The
Open is signified by a horizontal "tick" mark on the left side of the
vertical line bar. The Close is the horizontal tick mark on the right
side of the vertical line bar. The High is the very top of the vertical
line bar; and the Low is the very bottom of the vertical line bar. The
position of the Open and Close varies depending on where the opening
price and closing price are in relation to the rest of the bar prices.
Note that for the rest of this article, daily (typically 9:30AM Eastern
Standard Time to 4:00PM) price bars will be implied in all discussions;
although price bars can be any time frame from one minute to one hour to
daily to weekly and to monthly.
Up Day / Bullish Bar
If the close is higher than the open, then the bar is called an "up day" or Bullish Bar.
Down Day / Bearish Bar
If the close is less than the open, then the day is summarized as a "down day" or Bearish Bar.
OPEN Price
The Open is the price at which the first few trades
between buyers and sellers occur. The Open price is important mainly in
its relation to the prior price bar's close and the current price bar's
close. If the open is higher than the previous day's close then there is
a price gap up. Typically there is positive news on a stock or maybe
buyers were unable to get into the stock at the prior day's close and
want to make sure they buy at the open – all of these reasons can push
prices up overnight. The Open in relation to its Closing price will be
discussed in the Close paragraph.
HIGH Price
The High is the highest price in which a buyer and
seller transacted for the day. The top of the OHLC bar chart is the
high. The high in relation to other highs can give traders much
information. For instance, if the high of the prior day's high was $10
and today's high was $11, then buyers were able to make a new high,
which is bullish. If the previous day's high was $10 and today's high
was $10, then it appears as if an area of resistance has been created
where sellers feel confident selling. This area of resistance gains more
importance if many previous highs have reached the $10 price level and
fallen down from it. Lastly, if the prior day's high was $10, but
today's high was only $9, then prices made a lower high, which is
potentially bearish because buyers were unable to push prices to the
same level as yesterday and/or sellers became more eager to sell at
lower prices; nevertheless, both reasons are negative for buyers. The
High in relation to the close is discussed in the Close section. The
High in relation to the Low is discussed in the Range section.
Furthermore, the high as it relates to trends and reversals is discussed
in their respective sections later on this page.
LOW Price
The Low is the lowest price transacted for the day
between buyers and sellers; it is the bottom of the OHLC bar chart. The
Low in relation to prior lows can give traders valuable intelligence.
For instance, if the low of the prior day's low was $5 and today's low
was $4, then sellers were able to make a new low, which is bearish. If
the previous day's low was $5 and today's low was $5, then it appears as
if an area of support has been created where buyers feel confident
buying. This area of support gains more importance if many previous lows
have reached the $5 price level and bounced off of it upward. Lastly,
if the prior day's low was $5, but today's low was $6, then prices made a
higher low, which is potentially bullish because sellers were unable to
push prices to the same level as yesterday and/or buyers became more
eager to buy at higher prices; nevertheless, both reasons are positive
for buyers and negative for sellers. The Low's relation to the Close is
discussed in the Close section. The Low in relation to the High is
discussed in the Range section. Moreover, the Low and its relation to
uptrends and downtrends and trend reversals is discussed later.
CLOSE Price
The Close is by far the most important price of the
four OHLC prices. The Close can be viewed as the summary of the day's
trading. The location of the close on the price bar can suggest whether
buyers or sellers are in control of the day. When prices close near the
high, it can be inferred that buyers won the day; when prices close near
the low, it can be inferred that sellers won the day; and when the
close is at the center of the price bar, neither side is winning.
The
close is useful in its relationship to the high and low, to the day's
open, and to the prior day's close. As previously stated, if the close
is greater than the open, then the bar is called an "up day". If the
close is less than the open, then the day is summarized as a "down day".
However, the better measure of a price bar's sentiment (up day or down
day) is the close's relationship to the prior day's close. Therefore, if
today's close is greater than yesterday's close then the day was an "up
day"; and if today's close is less than yesterday's close, then it is a
down day. To illustrate why the prior day's close to today's close is
superior to the today's open and close, an example is given: The
previous day's close is $10, today's open is $15, and today's close is
$12. Using the today's close minus today's open, the bar would have been
a $3 down day ($12 - $15). However, today's close is $12 and
yesterday's close was $10, which would mean today's price action gained
$2 ($12 - $10). The gain of $2 is a far better representation of what
would have happened if a person owned the stock, namely yesterday a
person owned shares at $10/share and today they own shares at $12/share –
the shareholder made money.
High - Close = Selling Pressure; Close - Low = Buying Pressure
The difference between the high and the close can be viewed as
selling pressure because when prices reach the high price, buyers are
unable to maintain sufficient buying pressure to keep prices that high
all the way to the close. Therefore, sellers are able to come in and
push prices down from the high to the close. The size difference between
the high and close is important too. Were prices pushed down off the
high a few cents or a few dollars? Similarly, the difference between the
low and the close can be viewed as buying pressure because when prices
reach the low price, sellers are unable to maintain sufficient selling
pressure to keep prices that low all the way to the close. Therefore,
buyers are able to come in and push prices upward from the low to the
close. Again, the size difference between the low and the close signal
the strength of the buying pressure at the lows. Is the difference a few
pennies or a few dollars?
RANGE = High - Low
The High price minus the Low price is called the range.
Range can tell you the importance of a bar. For instance, if the
average daily range for a stock price is $1, then a price bar with a
range of 25 cents is rather unimportant; however, if a price bar was $5,
then this particular price bar is very important and attention should
be paid to it.
Volatility = Personality of Market
Range is a sign of volatility. Volatility equates to uncertainty.
Range volatility can be a description of the personality of the stock:
Are the price ranges small and the uptrends and downtrends orderly or
are the price ranges large and the price movements erratic? Is the stock
price range large enough to make any profit from moves even after
slippage and commissions? Are the price ranges large and unpredictable
enough to take out a trader's stop losses before making the expected
price move?
UpTrends
Typically, the definition of a trend is based on the relationship
of highs and lows; therefore, if over time prices have higher highs and
higher lows, then price bars are moving in an uptrend. See
the trendlines page for more information on creating uptrend trendlines
and the buy and sell signals associated with those trendlines.
DownTrends
If price bars have lower highs and lower lows, then price bars are moving in a downtrend.
See the trendlines page for more information on creating downtrend
trendlines and the buy and sell signals associated with those
trendlines.
End of UpTrend
After a series of higher highs and higher lows creating an
uptrend, when price bars make a lower high and lower low, this could be a
signal of a potential reversal of price action. Typically, these
reversal bars with lower highs and lower lows should make a drastic
break from the prior uptrend to be considered valid. See the chart
example at the end of this page for a real life example.
End of Downtrend
After a series of lower highs and lower lows that create a
downtrend, if price bars make a higher high and higher low, this could
be a signal of a potential reversal of price action. Typically, these
reversal bars with higher highs and higher lows should make a drastic
break from the prior uptrend to be considered valid. See the chart
example at the end of this page for a real life example.
UpTrends & DownTrends Bar Chart Example
The chart above of the Dow Jones Industrial Average ETF (DIA)
illustrates many aspects of the bar chart. First, since this is an
average of 30 stocks, the price ranges tend to be moderate and
consistent in size and the price movements tend to be orderly. Second,
this chart shows that uptrends are created from sequential price bars
with higher highs and higher lows and that downtrends are created from
multiple price bars in sequence with lower highs and lower lows. Also,
transitions from downtrend to uptrend often occur when a price bar with a
higher high and higher low comes after a downtrend; transitions from
uptrend to downtrend often occur when a price bar with a lower high and
lower low comes after an uptrend. Typically, the completed transition
from downtrend to uptrend occurs when prices with a higher high and
higher low break above the downward sloping resistance trendline (the
first and third [from left to right] orange lines). In contrast, the
completed transition from uptrend to downtrend occurs when prices with a
lower high and lower low break below the upward sloping support
trendline (the second and fourth [from left to right] orange lines).
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