Bar charts are one of the most popular trading chart types. They provide a lot of information that the day trader can use when making trading decisions and are relatively easy to read and interpret.
Bar charts consist of an opening foot—facing left—a vertical line, and a closing foot—facing right. Each bar includes the open, high, low, and close price that occurred during a specific interval, set by the trader.
For example, if a day trader opts to view a one-minute bar chart, then a new bar will form every minute, and each bar will show the open, high, low, and close price for each minute. The interval can also be something other than time, such as a specific number of transactions. When a chart displays transactions, it is called a "tick chart." Here, a new bar forms when a certain number of transactions have occurred for the stock or other asset being charted.
Bar charts also show the direction of movement—upward or downward—in the price, as well as how far the price moved during the bar. Day traders can then assess how the price is moving based on the bar chart. Those who make trading decisions based on those price bars are called price action traders.
- A bar chart is a popular type of day trading chart that includes a range of trading prices during a time period of your choice.
- You can also set bar charts to repopulate after a certain number of transactions rather than periods of time.
- Bar charts can be invaluable tools for a day trader who makes trading decisions based on how price is moving.
- Reading a bar chart is a simple process from left to right, but you’ll need practice to correctly assess the situation when prices are moving rapidly.
How to Read a Bar Chart
Bar charts are often called "OHLC bar charts" as well as "HLC bar" charts. The former is more popular and includes information on the open (O), high (H), low (L), and close (C) price, whereas the HLC chart just includes information on high, low, and close.
The open is the first price traded during the bar and is indicated by the horizontal foot on the left side of the bar.
The high is the highest price traded during the bar and is indicated by the top of the vertical bar.
The low is the lowest price traded during the bar and is indicated by the bottom of the vertical bar.
The close is the last price traded during the bar and is indicated by the horizontal foot on the right side of the bar.
Direction and Range
The direction the price has moved during the bar is indicated by the locations of the opening and closing feet. If the closing foot is above the opening foot, then the price made upward progress during the bar. If the closing foot is below the opening foot, then the price made downward progress during the bar.
The range of the bar is indicated by the locations of the top and bottom of the vertical bar. The range is calculated by subtracting the low from the high (Range of Bar = High - Low).
It takes a bit of practice to get used to reading a bar chart, especially when the price is moving very quickly. Remember that the open is always on the left, and the close always appears on the right (like how you read: from the right to the left, because the open always comes before the close). The vertical part of the bar represents how high and low the price went during the interval of the bar.
A bar chart can also typically include volume—for example, how many shares, forex lots, or futures contracts are changing hands on each bar. Therefore, it is also recommended that you understand buying and selling volume when reading a bar chart.
Frequently Asked Questions (FAQs)
What is an inside bar on a stock chart?
On a stock chart, an inside bar is a bar that doesn't break the high or the low of the bar before it. This indicates a decline in volatility; the same amount of time has passed, but the stock price has a smaller range. This signal can be combined with other indicators, such as movement in the VIX volatility index.
How long does it take to form a bar on a stock chart?
Each trader determines the time it takes to form a bar on their stock chart. The only limitations are those of the charting software you use. Some software may limit your choices to a handful of options, such as five-minute, one-hour, one-day, one-week, and one-month bars. Others may allow you to fully customize bar time frames down to the second. It may help to occasionally change time frames and consider the price action from a variety of contexts.