A bar chart or bar graph is a chart or graph that presents categorical data with rectangular bars with heights or lengths proportional to the values that they represent. The bars can be plotted vertically or horizontally.
A bar graph shows comparisons among discrete categories.
How Bar Charts Work
A bar chart is a collection of price bars, with each bar showing price movements for a given period. Each bar has a vertical line that shows the highest and 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 characterized by a small horizontal line on the right of the vertical line.
If the closing price is above the open price, the bar may be colored black or green. Conversely, if the close is below the open, the price dropped during that period to be colored red. Color coding the bars helps traders see trends and price movements more clearly. Color coding is available as an option in most charting platforms.
Traders and investors decide which period they want to analyze. A 1-minute bar chart, which shows a new price bar each minute, would be helpful for a day trader but not an investor. A weekly bar chart, which offers 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.
Interpreting Bar Charts
Because a bar chart shows the open, high, low, and closing prices for each period, traders and investors can utilize a lot of information.
Long vertical bars show there was a significant price difference between the high and low of the period. That means volatility increased during that period. When a bar has tiny vertical bars, it means there was little volatility.
If there is a considerable distance between the open and close, it means the price made a significant move. If the close is far above the open, it shows buyers were very active during the period, indicating more buying in future periods is forthcoming. If the finish is very near the open, there was not much conviction in the price movement during the period.
The location of the close relative to the high and low may also provide valuable information. If an asset rallied higher during the period, but the close was well below the high, it signals that sellers came in toward the end of the period. That is less bullish than if the asset closed near its high for the period.
If the bar chart is colored coded based on whether the price rises or falls during the period, the colors can provide information at a glance. An overall uptrend is typically represented by more green/black bars. Downtrends, on the other hand, are usually represented by more red bars.