How to read a Price Chart – Bar Chart – CandleStick – Kagi – Heikin Ashi

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Introduction

In this tutorial, you will learn how to read a Price Chart.

We examine:

  • Bar Chart
  • Japanese Candlestick 
  • Point&Figures
  • Kagi
  • Renko

Bar Chart and Japanese Candlestick are the most common methods.

All these techniques use the four most essential prices formed during the day.

The open price

It is the first price recorded during the day. It is a price that can be formed emotionally, as it is significantly influenced by signals coming from other financial markets.

In the opening, therefore, a positive environment can be created (risk-on) if the overall trend is constructive, or pessimistic (risk-off) if the global trend is negative.

 

It should be pointed out that there is often an opposite behavior between small operators and institutional investors in the opening of negotiations:

When there is optimism, in fact, the most emotional operators immediately buy with frenzy and agitation, causing lap-ups or gap-ups.

While the institutions use this initial stretch to liquidate their positions.

 

The former assumes that the market may rise further, while the last exit the market because they believe that already with this upward opening, the market itself has somewhat discounted the positivity provided by the other markets.

On the contrary, when there is pessimism, small operators sell anxiety boosts (generating lap-downs or gap-downs), while institutional operators leave any short positions and accumulate some long ones.

 

The former hypothesizes that the market may fall by the general negative behavior. At the same time, the latter opens up positions because they believe that already with this negative opening, the market has discounted the negativity that comes from other markets.

The maximum price (High)

It is the highest price recorded during the day and is, therefore, the highest point where buyers were able to push the market.

 

The fact that the latter has not risen further above this level may be due to two factors:

From a decrease in upward pressure. In this case, we have a maximum but there are no high volumes. It is, therefore, a maximum of a graphic type that does not constitute a particularly significant resistance.

From a strengthening of the downward pressure. The buyers were buying with a particular decision, but they were not able to push the prices higher because of a substantial current of sales that stopped the rise.

 

In this way, a maximum is formed that is accompanied by high volumes and highlights that there has been a decisive battle between sellers and buyers. In this case, the peak is an excellent level of strength, both graphical and volumetric.

 

It should be noted that two elements can generate the strengthening of the downward pressure:

From the closing of long positions.

Once certain levels have been reached, there may be some buyers who, having previously purchased at lower values, decide to exit the market.

 

From opening short positions. Maximum levels can be considered attractive for those operators working for short-term speculative purposes and who could sell the market shortly of anticipating a possible fall in prices.

 

The minimum price (low)

It is the highest price recorded during the day and is, therefore, the highest point where buyers were able to push the market.

 

The fact that the latter has not risen further above this level may be due to two factors:

From a decrease in downward pressure, which, at certain levels, reduced sales. In this case, a minimum is formed on which there are no high volumes, and it is, therefore, a minimum that does not represent particularly significant support.

From a strengthening of the upward pressure. The sellers were liquidating their positions with a particular decision, but they were not able to lower prices further.

 

In this way, a maximum is formed that is accompanied by high volumes and highlights that there has been a decisive battle between sellers and buyers.

In this case, therefore, the minimum constitutes an extraordinary level of support, both graphical and volumetric.

 

It should be noted that two elements can generate the strengthening of the downward pressure:

From opening new long positions. Minimum levels may be considered attractive by some operators who, taking advantage of the fall in prices, enter upwards.

 

In this case, we are talking about buy on dips, i.e., purchases that are made by exploiting the weakness of the market.

 

From closing short positions. Once certain graphic levels have been reached, there may be some operators who, having previously gone down (i.e., to higher values), close their positions and collect the capital gain.

The Close price

It’s the essential price of the session. It’s the final result of the battle that was fought throughout the session between buyers and sellers.

It expresses the final assessment of the market about the future direction that prices could follow.

 

It, therefore, measures the sentiment and conviction of the operators at the end of the day: in particular, it is influenced by the decisions of institutional investors, who have to decide whether to close or leave their positions open.

 

Important purchases at the end of the session are attributable to institutional investors who close short positions and open long positions, as they believe that the market can continue to rise.

Significant sales at the end of the session are attributable to institutional investors who close long positions and open short positions, as they believe that the market may suffer a further decline.

 

In general, we can state that:

The distance between the minimum price and the closing price measures the strength of buyers/bulls, while the gap between the maximum amount and the closing price measures the strength of sellers/bulldozers.

The more the closing price is close to the maximum of the day, the more the session must be considered upward.

 

The closer the closing price is to the day’s lows, the more downward the day is to be considered.

 

BASIC PRICE REPRESENTATIONS

The graphical analysis allows you to view the historical price series that are formed in financial markets.

There are many methods of representing a price graph.

Linear Charts

It’s the most comfortable chart to construct, since it only combines, through a continuous line, the closing prices of the financial asset (security, an index, a commodity, an exchange rate) under analysis.

It can be used to identify the primary trend followed by prices but does not provide particular operational insights.

It’s a method of representation that is often used to compare the performance of two or more financial activities.

 

how to read a linear stock chart

 

Bar Charts

It is the most commonly used method and allows you to represent each daily movement through a vertical bar, which highlights the four most important prices of the session: the opening price, the maximum price, the minimum price, and the closing price. The line on the left side of the vertical bar represents the opening price, while the line on the right highlights the closing price.

Depending on the positioning of the closing price and the closing price, you then have two possibilities: A bar with an opening price higher than the closing price. A bar with an opening price lower than the closing price.

It should be noted that the typical graphic representation provides that:

On the axis of the abscesses (i.e., the axis of the X), the passage of time is considered. Day after day, a new bar is added (to the left), which records what happened in the last trading session.

On the ordered axis (i.e., the Y-axis), the price scale is considered, which allows the market oscillation range to be displayed (in particular, the maximum and minimum values recorded over a certain period).

At the bottom, the total volumes exchanged during each day are displayed using a vertical bar.

Through the bar charts, it is possible to view the intraday movements made by prices over different periods. The most used are the following: •

  • 5 minutes
  • 15 minutes
  • 30 minutes
  • 45 minutes
  • 60 minutes

how to read a bar chart tutorial indian market

 

Japanese Candlestick

With Japanese candlestick, to represent the price fluctuation in the unit of time analyzed formed by:

A central body called a real-body, which indicates the distance between the opening price and the closing price.

The candle body can be green or red: you have a green body when the closing price is higher than the opening price, while a red body indicates a day that has had a closing price lower than the opening price.

Two shadows, two lines that identify the maximum price and the minimum price recorded over the chosen period and that take the name of Upper shadow and Lower shadow, respectively.

The first important distinction is between:

Green candles, in which the closing price was higher than the opening price, that identify a day that has had an upward trend.

Red candles, in which the closing price was lower than the opening price, which identifies a day that has had a downward trend.

 

how to read a japanese candlestick chart stock indian market

 

The central body

The central body (real-body) is the area that identifies the distance between the opening and closing prices.

Candles in which the distance between the closing price and the opening price (the real-body of the candle) is extended, are called the Long white line or Long black line.

 

Long lines identify directional sessions: in some cases, they confirm the presence of an existing trend; in others, they can provide a signal of reversal.

The figures opposite to the Long lines are the Short lines, i.e., candles that have a minimum difference between the closing price and the opening price, with the two shadows having a reduced length.

 

Short lines are a typical indecision pattern and highlight that there has been a substantial balance between buyers and sellers on the market.

Doji Candle

When the opening price is identical (or in any case very close) to the opening price, it is called a Doji candle.

The Doji report uncertainty and indecision, although they often constitute a simple pause within a very pronounced trend.

If they occur at the end of an upward movement or downward trend, they can, however, anticipate a reversal of trend, finding a place among the reversal patterns.

 

doji japanese candlestick

 

From a graphical point of view we can have four different types of Doji:

The Long-Legged Doji is characterized by a minimal body, due to the substantial coincidence between the opening and closing values, and by long shadows, both upper and lower.

The Gravestone Doji is characterized by a substantial coincidence between the opening price, the closing price, and the minimum price, with a long Upper Shadow that signals a maximum well away from the base.

It is a reversing candle and indicates the presence of a strong resistance area. If we find it at the top of a positive trend, it signals that the bulls have tried to push prices higher, but have been rejected by substantial profit-taking.

The Dragonfly Doji (dragonfly) is the opposite of the Gravestone: in this case, the opening price, the closing price, and the maximum price are identical, but a long Lower shadow characterizes the candle.

The Dragonfly Doji is a potential upward reversing candle, which occurs at the end of a downward trend and indicates the presence of a strong support area.

Four Priced Doji, all four of the most relevant prices of the day (opening, closing, maximum, and minimum), coincide.

It is a rare figure and can only occur on those assets where liquidity is reduced to a minimum.

 

Among the most popular single-candle graphical configurations are:

The Hammer

It is a candle that occurs at the end of a downward movement and is characterized by a long lower shadow and a small real-body, located at the top of the daily range.

The color of the real-body is indifferent: the fundamental aspect is the presence of a long lower shadow, whose length must be at least twice as long as the body of the candle.

 

It is a figure that often signals the end of a negative trend and the beginning of recovery: from an operational point of view, when identifying a hammer, it is advisable to close any existing downward positions and try to build an upward position.

The Shooting Star

It’s downward, reversing candle that occurs at the end of an upward movement. It is characterized by a huge Upper Shadow, while the real-body is small and is located in the lower part of the daily range.

It’s a figure that often signals the end of a positive trend and the beginning of a correction: from an operational point of view, when identifying a Shooting Star, it is advisable to close any long positions and build a downward position.

 

Among the most popular graphical configurations with two candles are:

The Bullish Engulfing

Consisting of a small black candle (Short black) followed by a long white candle (Long white).

 

The real-body of the first candle must be contained in the real-body of the second candle. Thus, the opening of the second spark plug must be less than the closing of the first spark plug, and the closing of the second spark plug must be greater than the opening of the first spark plug.

 

bearish endgulfing and bullish engulfing

 

The Long White candle signals that, after a brief consolidation break, buyers have taken control of the market, triggering a quick upside.

In the first candle, the volumes are contained, while in the Long White, the volumes must increase, confirming that there has been an apparent strengthening of the upward pressure on the market.

 

The Bearish Engulfing

which consists of a small white candle (Short white) followed by a long black candle (Long black).

The real-body of the first candle must be contained in the real-body of the second candle. Thus, the opening of the second spark plug must be greater than the closing of the first spark plug, and the closing of the second spark plug must be less than the opening of the first spark plug.

The Long black candle indicates that, after a short consolidation break, the sellers took control of the market, triggering a sharp decline. In the first candle, the volumes are contained, while in the Long White, the volumes must increase, confirming that there has been an apparent strengthening of the upward pressure on the market.

 

Point&figures

This methodology only studies price trends without taking into account the time factor.

Failure to consider the passage of time, on the one hand, is a limitation, but on the other hand, it allows you to focus on the most important graphical levels and prices.

 

To construct a Point&Figure chart, you must choose the minimum variation that prices must record to consider a movement significant.

 

This parameter, which must be established by observing the average/historical volatility of the underlying asset, assumes particular importance, since:

If the price variation is below the predetermined level, the Point&Figure chart does not record any changes. This eliminates/filters those movements of little relevance, which do not provide clear operational indications and which very often constitute erratic movements.

 

how to read a point and figure chart forex eurusd

 

If the price variation is greater than the predetermined level, the Point&Figure chart moves. For this reason, it is necessary to define a priori both the amplitude of this minimum variation and the number of boxes that are necessary to obtain a reversal signal.

 

On daily charts, for example, many analysts use three boxes to get a reverse signal. A Point&Figure chart draws an X, from bottom to top, whenever the price registers a percentage change more significant than the predetermined box. In this way, if the price continues to rise, “X’s” are drawn one on top of the other.

 

If at a later date, prices fall, the magnitude of which is higher than the percentage set as reverse, the graph moves one column to the right and draws “O” s from top to bottom.

 

The Point&Figure chart enables you to locate:

The presence of an upward trend and the presence of a downward trend.

Bounces and technical corrections. When the number of X’s is less than 3, it means that there has been a rapid technical rebound on the market, which has not, however, been sufficient to cause an upward trend reversal.

When the number of O’s is less than 3, it means that there has been a quick correction on the market, which has not, however, caused a downward trend reversal.

Point&Figure Breakouts

An upward breakout is highlighted by a box (X), which exceeds the maximum of a row of upward boxes (X) previously drawn.

A downward breakout is highlighted by a box (O), which falls below the minimum of a row of downward boxes (O) previously drawn.

And reverse.

When there is a column change, an upward inversion signal (if from O to X) or downward inversion signal (if from X to O) is provided.

 

From an operational point of view, the strategies that can be built with Point&-Figure charts are different. In particular,

Breakout entries, For example, an upward (long) signal is obtained when the maximum of a previous row of upward (X) boxes is exceeded, or a downward (short) signal is achieved when the minimum of a previous row of downward (O) boxes fails.

Reverse. For example, you may have an upward (long) signal at column change from O to X and a downward (short) signal at column change from X to O.

 

THE KAGI CHART

Over the years, starting from Gann’s original idea, which studied the behavior of financial markets with the Swing Chart technique, some particularly interesting operating methods have been developed.

One of these is the Kagi, with which a continuous line graph is constructed based on the fundamental value of the closing price (Close) of the chosen time frame.

 

If Kagi is applied to daily charts, the critical price is the nightly closing price, which is formed at the end of the day. If the Kagi is applied to intraday charts, the essential price is the last price beaten by the market in the chosen time interval.

The fundamental assumption of the Kagi methodology is that, if prices move in the direction of the primary trend, the graph reflects the changes that occur.

 

When prices undergo a charge opposite to that of the primary trend, for an amount equal to or higher than a particular predetermined share, a trend reversal occurs, and the graph interrupts its directional movement.

To understand how a Kagi chart is constructed, you have to start from a theoretical point 0.

Assuming a first upward (positive) change of an entity equal to or greater than the predetermined amount occurs, a Yang-line is drawn.

 

kagi chart forex gbpusd

 

If, on the other hand, a downward change occurs, which has a size equal to or greater than the predetermined amount, a Yin-line is drawn.

When in the next time frame, prices change by any entity in the previous direction, the line is stretched.

 

When there were a Yang-line and prices rose further, the thick line is stretched upwards.

If there is a Yin-line and prices have dropped further, the thin line is stretched down.

 

If prices change in the next time frame in the opposite direction, but less than the set amount, the graph does not change.

On the other hand, the line becomes horizontal only when there is an inversion signal.

 

However, this horizontal line maintains the thickness of the current trend: it is thick if the trend is positive, thin if the trend is negative.

Only when prices break this inflection-line, the thickness of the line changes and signals that a reversal of trend has been perfected in the market.

 

Yang-line to a Yin-line

You go from a Yang-line to a Yin-line when there is a downward reversal and from a Yin-line to a Yang-line when there is an upward reversal.

 

Analysis of the length of the thick and thin lines is essential to photograph the upward and downward pressure on the market. In particular:

The longer the period of the Yang-lines compared to the Yin-lines, the higher the buyers’ strength compared to the sellers’ expressed power.

 

This is the typical behavior of a Kagi chart when the market is in an up-trend.

The longer the length of the Yin-line compared to the Yang-line, the higher the strength of the sellers compared to the power expressed by the buyers.

 

This is typical Kagi chart behavior when the market is in a down-trend.

The analysis of the highs and lows of the Kagi chart is essential, as it allows you to identify the primary trend followed by the market.

 

Increasing highs and lows indicate the presence of an upward trend.

Decreasing highs and lows show a downward trend.

 

HEIKIN ASHI CANDLES

A further display of prices, an alternative to both standard bar charts and standard Japanese candles, takes the name Heikin Ashi.

The latter allows you to identify the primary trend on the market, eliminating those background noises that could provide false operating signals.

 

Heikin Ashi candles measure the strength and consistency of various market movements and make trends brighter and cleaner.

Heikin Ashi candles, in particular, do not show the opening price, the closing price, the maximum price and the minimum price at the canonical points highlighted by Japanese bars or candles, but calculate, with their parameters, the value of each candle, based on the dominant force present over a specified period.

 

If the market is within an upward trend, for example, the Heikin Ashi candle remains green, even if the closing price is lower than the opening price.

 

This is possible thanks to the particular way of building each Heikin Ashi candle, which is based on some precise rules and linked to each other.

 

heikin ashi chart forex usdjpy

 

The Calculation

The opening is given by the average of the body of the previous candle, then: (Opening of the previous candle + Closing of the previous candle) / 2

 

The formula to calculate the average is: (Opening + Maximum + Minimum + Closing) / 4

 

The Maximum is the essential value between the Maximum of the current candle, the Opening of the Heiken Ashi candle, and the Closing of the same.

The Minimum is the lowest value between the Minimum of the current spark plug, the Opening of the Heiken Ashi spark plug, and the Closing of the same.

 

Heiken Ashi candles are therefore calculated based on some parameters that come from the previous candles, thus creating a correspondence between the various candles.

UpWard and DownWard Trend

If prices are within a stable upward trend and a physiological correction occurs, Heiken Ashi candles do not change color.

HA retain a positive color, indicating that buyers still have control of the market and that, once this downturn is exhausted, prices may further increase.

This situation avoids premature closure of any long positions.

 

If prices are within a steady downward trend and a quick technical rebound occurs, Heiken Ashi candles do not change color.

HA retain a negative color, signaling that sellers still have control of the market and that once this recovery is exhausted, prices may fall further.

This situation avoids prematurely closing any short positions. To obtain any reversal signals, you can use Heiken Ashi candles in conjunction with Japanese candles.

 

When the market is within a stable upward trend, Heiken Ashi candles are bright, with a large body and shadows only at the top of the candle. Candles of this type indicate that the upward trend is strong, and there are, therefore, no signs of exhaustion.

Signs of weakening

The first signs of weakening come when candle bodies begin to shrink, and shadows appear at the bottom of HA candles.

 

The presence of indecisive figures can confirm these warning signs.

These signals then become more critical if they develop close to a substantial area of graphic resistance.

 

When the market is within a stable downward trend, Heiken Ashi candles are dark, with a large body and shadows only at the bottom of the candle.

Candles of this type indicate that the upward trend is strong, and there are, therefore, no signs of exhaustion. The first signs of weakening come when candle bodies begin to shrink, and shadows appear at the bottom of HA candles.

 

The presence of indecisive figures can confirm these warning signs.

These signals become more critical if they develop close to an essential graphic support area.

 

How to create Heikin Ashi Excel Stock Chart || Tutorial

 

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My name is Luca. I grew up in Italy. I have a degree in law and I’m an independent trader since 2007. I’m a systematic trader and sometimes, I trade using options strategies with US ETFs and Stocks.I have built hundreds of automated trading systems and indicators for TradeStation, MultiCharts and MetaTrader.I started this blog in 2017 to share what I learned in the financial market.

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