What is a bar graph?
Bar graphs show multiple price bars over time. Each bar shows how the price has changed over a specified period of time. A daily bar graph shows a price bar for each day. Each bar typically displays open, high, low and close (OHLC) prices for that period. This can be adjusted to display only the top, bottom and end (HLC). Technical analysts use bar charts (or other types of charts such as candlesticks or line charts) to monitor the performance of asset prices, which helps in making trading decisions.
Bar charts allow traders to analyze trends, spot potential trend reversals and monitor volatility / price movements.
Key points to remember
- A bar graph shows open, high, low and close prices for a specified period of time.
- The vertical line on a price bar represents the high and low prices for the period.
- The left and right horizontal lines on each price bar represent the opening and closing prices.
- Bar graphs can be color coded. If the closure is above the opening, it can be colored black or green, and if the closure is below the opening, the bar can be colored red.
How bar charts work
A bar graph is a set of price bars, each bar showing price movements for a given period. Each bar has a vertical line which indicates the highest price reached during the period and the lowest price reached during the period. The opening price is marked by a small horizontal line on the left of the vertical line, and the closing price is marked by a small horizontal line on the right of the vertical line.
If the closing price is higher than the opening price, the bar can be black or green. If the closing is below the opening, the price has dropped during this period, so it could be colored red. Color coding of price bars depending on whether the price has gone up or down helps some traders to see trends and price movements more clearly. Color coding is available as an option on most graphics platforms.
Traders and investors decide the period to analyze. A one-minute bar graph, which shows a new price bar every minute, would be useful for a day trader but not for an investor. A weekly bar graph, which shows a new bar for each week of price movement, may be appropriate for a long-term investor, but not so much for a day trader.
Interpretation of bar graphs
Since a bar chart shows the open, high, low and close price for each period, there is a lot of information that traders and investors can use on a bar chart.
Long vertical bars show that there was a big price difference between the high and the low of the period. This means that volatility increased during this period. When a bar has very small vertical bars, it means there was little volatility.
If there is a large distance between opening and closing, it means that the price has made a significant movement. If the closing is well above the opening, it shows that buyers have been very active during the period, which may indicate that more purchases in future periods are coming. If the close is very close to the opening, this shows that there was not much conviction in the price movement during the period.
The location of the fence relative to the highs and lows can also provide valuable information. If an asset rebounded during the period, but the closing was well below the peak, it shows that towards the end of the period, the sellers entered. This is less bullish than if the asset closed near its highest for the period.
If the bar graph is color coded according to whether the price increases or decreases during the period, the colors can provide information at a glance. An overall upward trend is generally represented by more green / black bars and strong upward movements in prices. The downward trends are generally represented by more red bars and strong downward price movements.
Bar charts and candlestick charts
Bar charts are very similar to Japanese candlestick charts. Both types of graphs display the same information but in different ways.
A bar graph is made up of a vertical line with small horizontal lines to the left and right that show the opening and closing. The candlesticks also have a vertical line showing the top and bottom of the period, but the difference between opening and closing is represented by a thicker part called a real body. The body is shaded or colored red if the closure is below the opening. The body is white or green if the closure is above the opening. Although the information is the same, the visual appearance of the two types of graphics is different.
Example of bar graph
The following graph shows an example of a bar graph in the SPDR S&P 500 ETF (SPY). During the declines, the bars generally lengthen, showing an increase in volatility. The declines are also marked by a drop in the price bars (red) compared to the bars (green).
As the price goes up, there are usually more green bars than red bars. This makes it possible to visually identify the trend. Even if there is usually red and green bars during an upward (or downward) trend, one is more dominant. This is how prices evolve. In order for the price to rise more in an uptrend, the price bars will need to reflect this by also moving higher, on average. If the price starts to fall, on average, by creating more red bars, then the price moves towards a decline or a reversal of trend.