Education

Lesson 6: Charts – What are They?

Charts can be defined as the graphical representation of a set of prices over a specific period of time. For instance, a chart can project the price movement of any financial instrument within a year where each of its points signifies the closing price of each day. Technical analysts use charts to analyze markets in order to predict future price movements.

If you want to have a deeper understanding of the chart, always remember that the price is located on the Y-axis while the time is situated on the X-axis.

According to the image attached below, it is a perfect example of the chart for Bitcoin. It projects the price movement of the market for 8 months. The base of the chart represents the date or time scale, and it runs horizontally on the X-axis. On the other hand, we have the vertical line which is the Y-axis which represents the price. It is popularly known as the candlestick chart and it projects the daily price range of Bitcoin.

Attributes of Chart

Investors and traders should pay attention to important details when they are viewing charts as these features play a prominent role. Details such as the price scale, time scale, and price point are crucial parts of the chart. We will take a look at these factors and explain how they affect the appearance of charts.

Time Scale

The time scale represents the range of dates that are visible at the base of the chart which can be varied from minutes to months. Examples of the used scales are the monthly, weekly, daily, and intraday time scales.

Day traders and are renowned for utilization of shorter timeframes, but the disadvantage of using the shorter timeframes is that they are prone to delivering false signals and making more noise as well as making it difficult to spot a real trend.

Day traders also exploit the intraday charts which show the movement of prices over a period of a day. A time scale of these charts can be represented in minutes for broader comprehension.

Investors usually use daily and weekly charts, and its price point shows the projection for a single day or week. When it comes to the issue of line charts, each point is a graphical representation of the closing price for the day. The attached image of the candlestick charts shows every point to exemplify the high, low, opening and closing prices of the day. These points could serve as an embodiment of changes in prices over a specific period of weeks, months to observe the trends of prices for a particular time.

For the analysis of long-term movements in the prices of cryptomarkets, it is crucial to make use of the daily, weekly, monthly charts. Each of the data points is a summarized report of past events. For example a weekly chart will inform you of the price movement that has taken place during the whole week or provide you with the closing price of the last trading day.

Price Scale and Price Point

The price scale is usually visible on the right side of the chart, and it also exhibits the price of the market. The price scale could be logarithmic or linear.

Here you can see the difference between 2 charts of the same market.

Linear chart

Linear price scales with the attached image have straight spacing between each price point, which denotes that a price that moves from $100 to $200 is the same distance as a price that moves from $1000 to $1100. The function of the price scale is to calculate absolute movements and does not portray the impacts of percentage changes in value over a period.

Logarithmic chart

Logarithmic scales measure the price movements regarding percentage, which only signifies that the spacing between each point is equivalent to the percentage change. For example, price change from $100 to $200 is 100% while a price change from $1000 to $1100 is only 10% even though the entire difference is the same – $100. Logarithmic charts will display a minor space between $1000 and $1100 than between $100 and $200 for this reason. Most of the experts are comfortable with the logarithmic charts as it is pretty easy to see how big price movements are represented on the percentage format as linear charts have a reputation for scattering when the market is moving at a fast pace.

In the next lesson we’ll talk about the types of chart. You will find out the difference between chart types and how to use them properly.