Technical Analysis: Chart Types – Definition, How it Works, Types, Calculation, and Trading

In the world of technical analysis, charts are essential tools that help traders and investors make sense of market behaviour. Whether you’re tracking daily price movements or long-term trends, understanding how to read and interpret different chart types can sharpen your decision-making process. From simple line charts to more complex candlestick and Renko formats, each chart type serves a specific purpose. In this guide, we’ll walk through the most commonly used chart types in trading, how they work, and how to apply them effectively, whether you’re new to trading or refining your existing strategies with TradeSmart.

What are Charts in the Stock Market?

In the realm of technical analysis, charts are indispensable tools that visually represent price movements over time. They enable traders to identify trends, patterns, and potential market turning points. Without these visual aids, deciphering price behaviour and making informed trading decisions would be significantly more challenging.

1. Line

Line charts are among the most straightforward tools in technical analysis. They connect a series of data points, typically closing prices, with a continuous line, offering a clear visual of a market’s closing trend over a specified period.

Originating in the early 20th century, line charts gained popularity due to their simplicity and ease of use. Many traders favour them for their focus on closing prices, which are often considered the most significant in market analysis.

In a line chart, the x-axis represents time, while the y-axis denotes price levels. This configuration allows traders to swiftly identify market directions—upward or downward. Consistent peaks and troughs on the line can signal a persistent trend, whether bullish or bearish.

For instance, tracking a stock over 30 days with each day’s closing price connected forms a line. A consistently upward-sloping line indicates an uptrend, whereas a downward slope suggests a downtrend.

Line charts are particularly useful for pinpointing support and resistance levels. Traders can easily observe price points where markets consistently rally or decline, aiding in strategic decision-making and enhancing overall trading accuracy.

For beginners, line charts offer an accessible entry point into technical analysis, while seasoned traders appreciate their clarity and emphasis on closing prices.

2. Bar

Bar charts are fundamental in technical analysis, providing detailed insights into price movements over time. Each bar represents a specific period and displays four key data points: opening price, closing price, high, and low.

To interpret a bar chart, observe the vertical line indicating the range between the highest and lowest prices during that period. Small horizontal lines on the left and right sides denote the opening and closing prices, respectively. A bar where the closing price is higher than the opening price often appears green or black, signalling upward momentum. Conversely, a red or hollow bar indicates a decline.

Bar charts offer more comprehensive data than line charts, which only display closing prices. This additional information enables traders to identify trends, reversals, and patterns. For example, a series of bars with higher highs and higher lows suggests an upward trend, while the opposite indicates a downtrend.

These charts also facilitate the assessment of market volatility. Wider bars with significant differences between high and low prices point to higher volatility, which is crucial for risk management strategies.

Bar charts are widely used among experienced traders seeking detailed, time-specific market data. Their ability to provide a fuller picture of market conditions makes them invaluable in technical analysis.

3. Candlestick

Candlestick charts are a cornerstone of technical analysis, offering a clear and intuitive way to visualise price action over specific timeframes. Each candlestick delivers four crucial data points: the open, close, high, and low prices for the period. This layout allows traders to gauge market sentiment and anticipate potential price moves with greater accuracy.

First developed by Japanese rice traders in the 18th century, candlestick charting has stood the test of time and is now a globally trusted method for analysing market behaviour.

A typical candlestick includes a rectangular body and thin wicks (also called shadows) extending from the top and bottom. The body represents the difference between the opening and closing prices, while the wicks mark the highest and lowest traded prices during the period. When the closing price is above the open, the candle is usually green or white, signalling a bullish session. If the close is lower than the open, it’s coloured red or black, indicating bearish sentiment.

Candlestick patterns, whether formed by a single candle or a sequence, provide important insights into market direction. Patterns like the Doji, where the open and close are nearly identical, signal indecision. Others, such as the Hammer, can indicate bullish reversals after a downtrend, especially when they appear at strong support zones.

To get the most from candlestick charts, it’s essential to consider the broader market context. When combined with support/resistance levels and technical indicators, candlesticks become a powerful component of a well-rounded trading strategy.

4. Point and figure chart

Point and figure (P&F) charts take a unique, time-independent approach to tracking price action. Unlike traditional charts that plot price against time, P&F charts focus exclusively on price movements—removing short-term noise and providing a cleaner view of major trends.

These charts consist of columns made up of Xs and Os: Xs represent upward price moves, and Os indicate downward moves. A new column is created only when the price reverses by a specified amount, known as the reversal size. The size of each box and the reversal threshold are set by the trader, allowing for customisation depending on market conditions and trading style.

For example, with a $1 box size, each X or O marks a $1 move in either direction. A new column forms only when the price reverses by a predefined multiple of this box size. This creates a simplified visual that helps traders focus on breakout levels, trend strength, and support/resistance without the distractions of time-based price fluctuations.

Point and figure charts have been used since the early 1900s and remain popular among traders who favour precision. Their flexibility and clarity make them particularly effective for identifying clean breakout signals and long-term trend shifts.

5. Renko

Renko charts are another Japanese invention, designed to focus entirely on meaningful price movement while ignoring the time element. The name “Renko” is derived from the Japanese word renga, meaning “brick,” and that’s exactly what you’ll see—bricks that build upward or downward depending on price direction.

Each brick in a Renko chart appears only when the price moves by a pre-set amount. A new green brick signals upward momentum, while a red brick shows a downward shift. Unlike candlestick or bar charts, no new bar is formed unless the price meets this movement threshold, which makes trends far easier to visualise and follow.

This filtering effect removes the noise of small, insignificant price changes, allowing traders to focus on the bigger picture. A string of green bricks may indicate a strong uptrend, while a switch to red bricks could highlight a potential reversal. These clear transitions are particularly useful for traders looking to capture sustained directional moves.

Choosing the right brick size is crucial: smaller bricks capture more granular shifts but may introduce noise, while larger bricks show broader trends but risk overlooking shorter-term movements. When tailored to your strategy, Renko charts can enhance your ability to identify trend continuation or breakout opportunities with clarity.

6. Heikin-Ashi

Heikin Ashi, which translates to “average bar” in Japanese, is a powerful charting technique that smooths price data to highlight underlying market trends more clearly. Unlike traditional candlestick charts that use raw open, high, low, and close prices, Heikin Ashi modifies these values to reduce noise and provide a more consistent visual of trend direction.

The values for each Heikin Ashi candle are calculated as follows:

This smoothing effect allows traders to better recognise sustained trends and possible reversals without being distracted by short-term price spikes. For instance, a consistent series of green Heikin Ashi candles suggests a strong uptrend, while a shift to red may signal the beginning of a downtrend.

Heikin Ashi charts also pair well with other indicators like moving averages or RSI, adding another layer of analysis. Their clean, trend-focused structure makes them a favourite among both beginners seeking clarity and seasoned traders looking to refine trend-based strategies.

Who Uses Charts in the Stock Market?

A wide range of market participants use charts to make informed decisions—from retail traders to institutional investors. Here’s how different profiles benefit from technical charts:

Technical Analysts: Charts are their primary tool for studying past price behaviour and predicting future movements. Patterns, trendlines, and indicators all stem from chart analysis.

Day Traders: Rely heavily on real-time data from candlesticks and bar charts to execute multiple trades within a single day. These charts help them capitalise on short-term market fluctuations.

Swing Traders: Use chart types like Renko or point & figure to filter out minor volatility and spot medium-term opportunities. They typically hold positions for days or weeks.

Long-Term Investors: Often refer to line charts and other clean formats to observe overall market direction over months or years. These charts help in making strategic decisions like portfolio rebalancing.

Financial Advisors: Incorporate charting analysis to develop tailored investment plans. They use historical trends and forecast data to guide clients through asset selection and timing.

Market Technicians: Professionals dedicated to studying technical market data often rely on tools like Heikin Ashi charts to interpret crowd psychology and manage risk.

No matter the trading style or time frame, charts are indispensable across the investing spectrum.

Why are Charts Necessary?

Charts serve as the foundation of technical analysis. They distil vast volumes of price data into digestible visuals, allowing traders to spot trends, key levels, and momentum with clarity.

By analysing chart patterns, we can gauge market sentiment, project future price movements, and identify critical zones such as support and resistance. Rather than guessing, traders using charts make data-backed decisions grounded in historical behaviour.

Charts also enable comparative analysis by overlaying multiple indicators, such as volume, RSI, or moving average, on price data. This layered view provides a deeper understanding of trend strength and trading signal reliability.

The versatility of charts further enhances their value. With customisable time frames, styles, and indicators, traders can adapt their analysis to align with specific strategies—whether they’re scalping short-term moves or planning long-term entries.

At TradeSmart, we encourage traders to make decisions based on insights, not instinct. Charts are the visual bridge between data and action, making them essential for anyone serious about trading effectively.

What are the Common Types of Patterns Used in the Stock Market?

Identifying chart patterns is a vital part of technical analysis. These formations help traders anticipate future price movements based on historical behaviour. Broadly, stock market patterns fall into three main categories: reversal, continuation, and bilateral patterns.

Reversal Patterns

Reversal patterns suggest that the current trend may be nearing its end and about to change direction. Common examples include:

Continuation Patterns

Continuation patterns indicate that the prevailing trend is likely to resume after a brief consolidation. Key formations include:

Bilateral Patterns

Bilateral patterns are neutral formations that can result in a breakout in either direction. These include:

Conclusion

Choosing the right chart type is more than a matter of preference—it’s a strategic decision that can impact how you interpret price movements and market signals. Line charts offer simplicity, candlesticks deliver visual clarity, and advanced formats like Renko or Heikin-Ashi help filter out market noise. Whether you’re a day trader seeking precision or a long-term investor focused on macro trends, understanding each chart’s strengths and weaknesses will help you trade more confidently. At TradeSmart, we’re here to provide the tools and insights you need to turn these patterns into smarter trades.