Bar Chart

Updated on April 29, 2024
Article byShrestha Ghosal
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Bar Chart?

A bar chart is a technical analysis tool that displays a financial instrument’s highest and lowest price range, opening price, and closing price for a specific time frame using vertical bars. Traders and analysts use this chart analysis to identify market price trends, support and resistance levels, chart patterns, and other relevant information about the market price movements.

What Is Bar Chart

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Source: Bar Chart (wallstreetmojo.com)

A bar chart technical analysis is instrumental in studying price data for making informed trading decisions. Traders can gain valuable insights into the market dynamics, price volatility, and potential price reversals by analyzing the bars’ length, position, and color.

Key Takeaways

  • A bar chart is a technical analysis instrument that traders use to analyze market price movements, identify price trends, determine support and resistance levels, and study other significant market patterns.
  • These charts include vertical bars that display four crucial points in a financial instrument’s price data: the opening price, closing price, and the highest and lowest price range.
  • It offers traders and analysts a visual representation of the price data. Additionally, it allows traders to gain valuable insights into price trends and overall market sentiments.

Bar Chart Explained

A bar chart is a measure of technical analysis that traders and analysts employ to analyze price data and make informed trading decisions. A bar chart technical analysis involves the interpretation of these charts that provide a visual representation of market price movements over a certain period using vertical bars. Each bar contains four crucial data points of a financial instrument – high, low, opening, and closing prices.

Additionally, traders usually combine this chart analysis with other technical indicators, including moving averages and volume analysis. It allows them to understand market conditions better and identify crucial trading signals. Furthermore, traders can perform historical analysis using these charts to assess previous price behavior and patterns. This chart in technical analysis offers traders a visual and systematic approach to understanding the market dynamics, identifying market price trends, determining the overall market sentiment, and making informed trading decisions.

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Types

The types of bar charts from TradingView are:

  • Up day: When the high and low of the present bar is higher than the previous bar, it is known as an up bar or up day. In the chart of Meta Platforms, Inc. given below, on 29th April 2021, the red bearish bar is totally above the previous bar, which can be called an Up day bar pattern.
Bar Chart Types - Up Day

Source

  • Down day: If the high and low of the present bar is lower than the previous bar, the bar is known down bar or down day. In the same chart as above, there is also a down day bar, on 4th May, 2021, where the entire body of the new bar is below the previous one. 
Bar Chart Types - Down Day

Source

  • Inside day: In this type of bar chartthe high of the present bar is lower than the previous bar’s high, and the low of the current bar is higher than the previous bar’s low. For the same chart of Meta Platforms, Inc. there is also an Inside bar on 23rd March, 2021, in which the entire red bar is totally inside the previous day’s bar. 
Inside Day

Source

  • Outside day: In this bar type, the high of the present bar is higher than the previous bar, while the low of the current bar is lower than the previous bar. In this chart below too, the bar chart on 28th Jan 2021 shows an outside day bar, in which the current one totally engulfs the previous day’s bar. 
Bar Chart Types - Inside Day

Source

Thus, the above chart of Meta Platforms, Inc. clearly show all four types of Bar and how they will appear to the trader. 

Examples

Let us go through a few examples:

Example #1

Example of Bar Chart

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Each bar in this chart type represents a particular period. It depicts the open, high, low, and close (OHLC) prices in one vertical bar. The bar’s highest point signifies the highest trading price during the period, while the bar’s lowest point represents the lowest trading price. The short horizontal line to the left indicates the opening price during the specific period, while the short horizontal line to the right indicates the closing price. This is an example of a bar chart.

Example #2

Suppose John prepared a bar chart signifying the daily closing prices of a stock over a month. The charts’ bars displayed the range between the highest and lowest prices, with a small horizontal line on the left indicating the opening price and a small horizontal line on the right showing the closing price. John observed a series of bars where each successive high was higher than the previous one, and each consecutive low was higher.

Bar Chart Uptrend

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This pattern indicated an uptrend meaning the buyers have consistently pushed the stock price higher. It indicated a positive market sentiment. John could identify the overall price trend by examining the bar sequence. This is an example of a bar chart.

Benefits

The bar chart benefits are:

  • Visualizing Price Patterns: These charts visually represent market price movements. They make it easier to identify market patterns and trends. Traders can visually analyze the highs, lows, and opening and closing prices within specific periods. Furthermore, traders can use them to identify support and resistance levels, trend lines, and chart patterns.
  • Identifying Trends: They are instrumental in determining trends in the market. Traders can identify price trends by observing the sequence of the bars. This information is valuable for making well-informed trading decisions and understanding overall market sentiment.
  • Assessing Volatility: The bar’s length in these charts depicts the price range during a specific time frame. A more extended bar indicates higher price volatility, whereas a shorter bar indicates lower volatility. Traders can assess the market volatility accurately through these charts. Moreover, they help traders in adjusting risk management strategies and position sizing.
  • Determining Support and Resistance Levels: One of the bar chart benefits is that these charts aid traders in identifying support and resistance levels. These levels signify areas where the price tends to find support during declines or faces resistance during advances. By identifying these levels, traders can make more accurate predictions about potential price trends, reversals, or breakouts.
  • Historical Analysis: These charts provide a historical outlook on the market price movements. They allow investors to analyze previous market behavior and identify recurring price trends. This historical analysis can help traders make informed decisions based on previous price actions and augment their understanding of the market dynamics.

Bar Chart vs Histogram vs Column Chart 

The differences between them are as follows:

  • Bar Chart: Traders use these charts to display price data, including the financial instrument‘s open, high, low, and closing prices. They offer a visual representation of price movements over a particular period. Analysts use them to identify trends, support, resistance levels, and chart patterns. They are suitable for analyzing sequential data and are broadly used in stock market analysis.
  • Histogram: Investors generally use them to study volume data like a stock trading volume. Traders can gain valuable insights into market activity and identify significant volume levels and patterns by observing volume distribution within intervals.
Histogram Example

Source

In the chart of Bitcoin above, both Bar chart and Histograms are visible. While the bras show the price movement, the histogram shows the volume traded each trading session, be it hourly, daily, weekly or monthly. Using both together makes the chart more informative and helps in taking better trading decisions. 

  • Column Chart: These charts are beneficial for analyzing market breadth indicators like the number of advancing and declining stocks in an index. Moreover, traders use them to study several indicators, like the number of stocks above or below certain moving averages. These charts offer a visual comparison of data points. They are instrumental in identifying price trends or deviations within a particular category.

Bar Chart vs Candlestick Chart 

The differences between the both are as follows:

  • Bar Chart: These charts represent price data using vertical bars, where each bar signifies a specific period. The bars display the opening, closing, and high and low prices for that period. These charts provide an essential and easy-to-understand visual depiction of price movements. Traders and analysts commonly use these charts to identify price trends, chart patterns, and support and resistance levels. These charts highlight the opening and closing prices which are significant for understanding the current market trend and identifying the potential entry and exit points. The pattern of such a chart is already explained using the chart of Meta Platforms, Inc. in the section where the types of bar charts are mentioned. 
  • Candlestick Chart: These charts display price data over a specified period. However, they use candlestick-shaped patterns instead of bars. Each candlestick comprises a body and wicks, the upper and lower shadows. The candlesticks represent the opening, closing, high, and low prices. These charts provide more detailed information and use different colors to identify bullish and bearish trend periods. Thus, it is easier for traders to identify market sentiment through this chart quickly. Given below is a Nasdaq chart, where the candlesticks appear very prominently. 
Candlestick Example

Source

Frequently Asked Questions (FAQs)

1. Can bar charts be used to identify support and resistance levels? 

Yes, these charts are valuable for identifying support and resistance levels. Investors look for areas on the chart where the prices consistently face resistance or encounter support. Traders can identify the resistance and support levels through horizontal lines across multiple bars at certain price levels.

2. What are some limitations of bar charts? 

This chart is an important tool in technical analysis. However, these charts come with certain limitations. For example, they do not provide comprehensive information about intraday price movements or precise trade timings. Additionally, these charts are cluttered and difficult to read when there is a lot of market activity or when studying multiple instruments simultaneously.

3. Can bar charts be used for volume analysis? 

Yes, traders can use these charts for volume analysis. Moreover, traders use them for studying market price movements. They can monitor the relationship between the price and volume by incorporating volume bars into these charts. These charts can provide valuable insights into the market’s strengths and weaknesses through higher volumes during price recoveries or declines.
 

This has been a guide to what is Bar Chart. We compare it with histogram, column & candlestick charts, explain it with its examples & benefits. You can learn more about it from the following articles –

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