Everyone knows what a classic line stock chart looks like, but show them a stock charted in candlestick form and they wonder what all of those fat vertical lines are and what they mean. Knowing the differences between line and candlestick charting will help you decide which form to use and when to use it.
Line charts versus candlestick charts
A line chart only plots one type of price over a specified period. You could set the parameter to closing, opening, high or low prices, for example. This doesn’t give you an overall idea of the price action of the stock, just where it stands at a specific point in time or in its trading range each day.
Here’s a line chart on Facebook Inc. (FB), on the daily timeframe, using closing prices.
Obviously, this is pretty simple. By plotting only closing prices, it provides limited information, but it also removes some noise, making it easy-to-read and use.
By comparison, Japanese candlestick charts provide more information, and are widely used to show a more complete idea of a stock’s price action.
Candlesticks include the opening, high, low and closing prices for a specified period, all in one candle. A green candle is plotted when the stock’s price closes higher than it opened in that period; a red candle means the stock was down.
Here’s a look at the same chart on Facebook, this time using candlesticks.
Pretty different, right?
Candlestick charts provide more information, and you’re able to see gap ups and gap downs, as well as other technical patterns. They give a fuller picture compared to the snapshot you get from a line chart; which you use ultimately depends on how much information you want or need, though odds are that the more you trade the more detail you will want to include in your trading.
Taylor Conway is the lead day trader at PennyPro.com. He is a short-term day trader of stocks and ETFs.