Charts

Line Chart
The most basic of the four charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.

Bar Chart
Perhaps the most popular charting method is the bar chart. The high, low and close are required to form the price plot for each period of a bar chart. The high and low are represented by the top and bottom of the vertical bar and the close is the short horizontal line crossing the vertical bar. On a daily chart, each bar represents the high, low and close for a particular day. Weekly charts would have a bar for each week based on Friday's close and the high and low for that week.
The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open).


Candlestick Charts
Originating in Japan over 300 years ago, candlestick charts have become quite popular in recent years. For a candlestick chart, the open, high, low and close are all required. A daily candlestick is based on the open price, the intraday high and low, and the close. A weekly candlestick is based on Monday's open, the weekly high-low range and Friday's close.
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period's trading range. The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period.
In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called "the body" (also referred to as "the real body"). The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.

Support and Resistance

Support and resistance lines appear as thresholds to price patterns. They are the respective lines where prices stop going down or up.

Support
A support line is the level that a stock's price generally does not fall below. It marks the price level at which there is a sufficient amount of demand to stop and possibly, for a time, turn a downtrend higher.

Resistance
A resistance line is the level above which a stock's price generally will not rise. It indicates a price level at which a sufficient supply of stock is available to stop and possibly, for a time, head off an uptrend in prices. Trendlines are often referred to as support and resistance lines on an angle.

Why do Support and Resistance Occur

A stock's price is determined by supply and demand. Bulls buy when they think a stock is priced too low. Bears sell when they feel prices have peaked. Bulls bid up the price by increasing demand, bears pull it down by increasing supply. When the bulls and bears find a price point they can agree on, the market reaches a equilibrium.
When prices are trending upward, there's a point at which the bulls begin to pull back and the bears become more aggressive - the market balances along the resistance line.
When prices are trending downwards, the market balances along the support line. As prices decline toward that support line, buyers become more inclined to buy and sellers starting holding on to their stocks. The support line marks the point where demand takes precedence over supply and prices will not fall below that support line. The reverse holds true for a resistance line.
Prices often break through support and resistance lines. A break through a resistance line shows that the bulls (the buyers) have won out over the bears (the sellers). The bulls are determined to bid the price of the stock higher than previous highs. Once the resistance line is broken, another will be created at a higher level. The reverse holds true for a support line.
Support levels can transform into resistance levels and vice versa. After prices break through a support level investors may try to limit their losses by selling the stock, pushing prices back up to the line which now becomes a resistance level.

Why are support and resistance lines important?
Technical analysts often say that the market has a memory. Support and resistance lines are a key constituents of that memory.
Investors "tend to remember previous price levels and thus this makes them important. While a stock is changing its price level rapidly, day after day, the public will be buying and selling at widely divergent levels and there will be no unanimity, or strong memory impression, in such changing prices." But, when prices form an "area" and trade within a fairly narrow range for a period of time, investors begin to remember that specific price.
The longer the prices stay in that area and the greater the volume in that spot, the more important that level becomes because investors remember it exceptionally well. Therefore, that level takes on added significance for the technical analyst. According to experts, previous support and resistance levels can be used as "target" or "limit" prices when the market have traded away from them. Assume that a year ago a rally ended with a top price of 125. That price of 125 then becomes a resistance level for the rally occurring in today's market.
How can support and resistance lines be used by investors?
Investors should be aware that support levels are usually below the current price; resistance levels are often above the current price. Also, it is not unusual for prices to move below or above a support or resistance level for very short periods of time during a volatile trading period.

Conclusion

Support and resistance levels are important tools for the technical analyst. By monitoring whether a stock's price is nearing a support or resistance level, an investor will be aware of whether a reversal may be in the offing. Together with monitoring the proximity of the price to the support or resistance level, a vigilant investor will also monitor trading volume in the stock. Increased volume is another key sign that a reversal may be at hand.

Technical Analysis vs Fundamental Analysis

The methods used to analyze securities and stocks and make investment decisions fall under two very generic categories: fundamental analysis and technical analysis.

Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't look at the fundamentals of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. It is more dependant on the emotions of the people buying and selling stocks and hence corresponds more closely with human behaviour.

Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.