Posted by: Livy | February 12, 2009

Chart Fundamentals

Line, OHLC, and Candlestick Chart Basics

A chart is a visual representation of the price of a security over time. More advanced charts, such as the OHLC chart and the candlestick chart provide further information such as the open and close price. Advanced overlays such as volume, simple moving averages, on-balance volume (OBV) provide additional “road signs” to trend reversals and pattern formation and will be covered at a later time. Technical analyst’s will often ignore most outside news and make the vast majority of their trading decisions based on their interpretation of a chart and what it indicates will happen based off patterns, mathematical indicators, and back-testing. The purpose here is to give the chart fundamentals; indicators will come later.

There are many different sources for charts. Your online broker should have a few different options. In addition sufficient charts can be found at:

Line Chart
The most fundamental of charts, and often seen on news channels such as CNBC, CNN, FoxNews, your local network syndicates, and newspapers is called the line chart. It simply shows the price of a security over time with a line drawn between the end-of-day prices. Little explanation is needed here and an example should suffice. The price is on the vertical axis, the measure of time on the horizontal axis. This particular chart also shows the volume at the bottom of the chart. Negative trends are in red, positive trends are in black.

Basic Line Chart

OHLC Chart
Another common chart seen on websites and charting software is known the OHLC chart. This stands for Open, High, Low, and Close. Each ‘tick’ is known as a price bar. A price bar is a representation of a price during a set amount of time (minute, hour, day, week, month, etc) that includes the open price, close price, highest price, and lowest price within that specific time frame. A price-bar adds another level of depth with this information on display and allows the trader a deeper level of interpretation and stronger sense of understanding in how that security acted during that specific price bar, and over the time of the chart.

First, let’s examine a price bar by itself. Remember, a price bar represents a specific unit of time, defined by the trader. This first example on the left shows an up-tick price bar, or if you were looking to see the value of this security go up, a “good day”. The example on the right shows a down-tick “bad day”, unless you are selling short. The left side of the vertical line always shows the open, the right side always shows the close.


As one can imagine, a wide variety of shapes and sizes can be created over the time frame of a chart. Let’s look at the same chart from before, only as an OHLC chart. Notice that the “good days” are in black and the “bad days” are in red. The highlighted price bar on the right is today so far.


Candlestick Charts
Candlestick charting displays the price bar in a new and unique way, but the patterns they create can be strong indicators. The very shape of a candlestick can indicate a trend reversal, pattern confirmation, etc. They are easy to read and interpret, have been given unique names that make remembering the many patterns and indicators easy, which in turn makes recognizing the pattern easier. They are widely used and since the stock market is a ‘mob mentality’ knowing that thousands of other traders are seeing the same thing can help you make better decisions.

The candlestick form, like an OHLC price bar, represents a certain unit of time. The form emphasizes the open and close in what is known as the real body. Beyond the real body, unless the open or close was the high or low, a thin line extends; this is known as the shadow. Typically a white real body would be a “good day” and a black or red real body would be a “bad day”.


A candlestick with no real body is known as a doji. Doji’s can be strong indicators of a trend reversal. In a doji the market open and close are at or nearly at the same level. This means that the security is in a transition phase and neither bulls nor bears got an upper hand and the day ended in a stand-off. A doji gains meaning from it’s placement within a set of bars. If the price series has been an in uptrend the doji may reflect that the bullish sentiment is coming to an end. Doji’s mean different things in different places, and that will be covered more in depth in the candlestick chart indicators and patterns.


The Hammer and Hanging Man are another form of the candlestick that can indicate a reversal, and need to be identified readily and easily in a chart. They both have a small real body and one long lower shadow. A hammer has a white real body and a hanging man has a black real body. Do not make assumptions of what this indicator means without further knowledge, it all depends on it’s placement within a chart or a price pattern. A very basic rule of thumb, with a number of variations, is that a hammer following a downtrend indicates a trend reversal up, and vice versa.


Finally, we identify the Harami. A Harami is the most basic of two bar patterns. It occurs when a small real body candlestick follows a large one. Harami means pregnant in Japanese. The entire small body candlestick, including it’s shadow, stay within the real body of the larger predecessor. A Harami can be black, white, even a doji. Harami’s are useful in discounting confirmation patterns. If you think you see an upward trend with a large white body candlestick, followed by a black Harami, your upward trend was probably just blown out of the water.


Now that you’ve seen the very basic candlestick shapes, let’s again reexamine the original chart, in it’s candlestick form.


Further patterns and indicators will be examined in further articles. We will examine patterns, candlestick charts, and mathematical indicators such as On-Balance Volume (OBV), Moving Averages, Bollinger Bands, Relative Strength Indicator (RSI), and others.

I hope you find this of use as you work towards gaining a basic knowledge of charts and technical analysis.




  1. […] the article, Chart Fundamentals, we covered the basic form and shape of the line chart Open, High, Low, Close price bar and chart, […]

  2. […] the article, Chart Fundamentals, we covered the basic form and shape of the line chart Open, High, Low, Close price bar and chart, […]

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