How a Bar Chart Works In Trading

A bar chart displays a security's open, high, low, and closing prices. Each bar on a bar chart represents price performance for a specific period (a day, month). Bar charts are the most popular type of security chart and amongst bar charts daily bar charts are the most popular.

In this chart the top of each vertical bar represents the highest price that the security traded during the period, and the bottom of the bar represents the lowest price that it traded. For example on 4th April the closing and low value is 43. The opening value is 43.5 and the highest value is 44.

Interpreting Bar Charts

The first step is to identify the trend and then look for signs that the trend is either strengthening or weakening. This trend is determined in accordance with Dow theory. A downtrend is a series of bars with lower highs and lower lows. An up-trend is a series of bars with higher highs and higher lows. This is indicated by the figure below

An up trend is started by a bar with a higher high and higher low than the previous bar. Down trend is started by a bar with a lower high and lower low than the previous bar.

There are often uncertainties amongst the buyers and sellers, which leads to uncertain trends. The inside days, outside days and borderline days are signs of uncertainty in a trend.

Inside days have a lower high and a higher low when compared to the preceding bar. Outside days have both a higher high and a lower low than the previous day. Borderline days are similar to inside or outside days except that there is an equal high or equal low.

Expanding and Contracting Ranges The expanding range in an up trend signal is the increasing eagerness from buyers. Contracting ranges show the decreasing eagerness. The eagerness of buyers and sellers is subject to the position of the closing price in relation to the close on the preceding bar. The larger the distance is the greater the eagerness.

Closing Price Compared to the Range

The range is the distance between the high and the low on a bar. The position of closing price on the bar indicates who controls the market at the end of the day. As shown in the figure, the first line has the closing price at the top of the bar.

This signals that buyers have control that is they will buy into the close of the market, with less profit-taking, and move price towards the high for the day.

In the second line since the bar is in the middle this shows that both the parties are not committed.

In the third figure the closing price at the bottom of the bar indicates that sellers have control. If they are committed they will sell into the close and move price towards the low for the day.

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