Bar Chart (OHLC Chart) Basics
The bar chart or OHLC (Open, High, Low, Close) chart is a way to summarize price movement during a set period of time. The Open is signified by a horizontal "tick" mark on the left side of the vertical line bar. The Close is the horizontal tick mark on the right side of the vertical line bar. The High is the very top of the vertical line bar; and the Low is the very bottom of the vertical line bar. The position of the Open and Close varies depending on where the opening price and closing price are in relation to the rest of the bar prices. Note that for the rest of this article, daily (typically 9:30AM Eastern Standard Time to 4:00PM) price bars will be implied in all discussions; although price bars can be any time frame from one minute to one hour to daily to weekly and to monthly.
Up Day / Bullish Bar
If the close is higher than the open, then the bar is called an "up day" or Bullish Bar.
Down Day / Bearish Bar
If the close is less than the open, then the day is summarized as a "down day" or Bearish Bar.
The Open is the price at which the first few trades between buyers and sellers occur. The Open price is important mainly in its relation to the prior price bar's close and the current price bar's close. If the open is higher than the previous day's close then there is a price gap up. Typically there is positive news on a stock or maybe buyers were unable to get into the stock at the prior day's close and want to make sure they buy at the open – all of these reasons can push prices up overnight. The Open in relation to its Closing price will be discussed in the Close paragraph.
The High is the highest price in which a buyer and seller transacted for the day. The top of the OHLC bar chart is the high. The high in relation to other highs can give traders much information. For instance, if the high of the prior day's high was $10 and today's high was $11, then buyers were able to make a new high, which is bullish. If the previous day's high was $10 and today's high was $10, then it appears as if an area of resistance has been created where sellers feel confident selling. This area of resistance gains more importance if many previous highs have reached the $10 price level and fallen down from it. Lastly, if the prior day's high was $10, but today's high was only $9, then prices made a lower high, which is potentially bearish because buyers were unable to push prices to the same level as yesterday and/or sellers became more eager to sell at lower prices; nevertheless, both reasons are negative for buyers. The High in relation to the close is discussed in the Close section. The High in relation to the Low is discussed in the Range section. Furthermore, the high as it relates to trends and reversals is discussed in their respective sections later on this page.
The Low is the lowest price transacted for the day between buyers and sellers; it is the bottom of the OHLC bar chart. The Low in relation to prior lows can give traders valuable intelligence. For instance, if the low of the prior day's low was $5 and today's low was $4, then sellers were able to make a new low, which is bearish. If the previous day's low was $5 and today's low was $5, then it appears as if an area of support has been created where buyers feel confident buying. This area of support gains more importance if many previous lows have reached the $5 price level and bounced off of it upward. Lastly, if the prior day's low was $5, but today's low was $6, then prices made a higher low, which is potentially bullish because sellers were unable to push prices to the same level as yesterday and/or buyers became more eager to buy at higher prices; nevertheless, both reasons are positive for buyers and negative for sellers. The Low's relation to the Close is discussed in the Close section. The Low in relation to the High is discussed in the Range section. Moreover, the Low and its relation to uptrends and downtrends and trend reversals is discussed later.
The Close is by far the most important price of the four OHLC prices. The Close can be viewed as the summary of the day's trading. The location of the close on the price bar can suggest whether buyers or sellers are in control of the day. When prices close near the high, it can be inferred that buyers won the day; when prices close near the low, it can be inferred that sellers won the day; and when the close is at the center of the price bar, neither side is winning.
The close is useful in its relationship to the high and low, to the day's open, and to the prior day's close. As previously stated, if the close is greater than the open, then the bar is called an "up day". If the close is less than the open, then the day is summarized as a "down day". However, the better measure of a price bar's sentiment (up day or down day) is the close's relationship to the prior day's close. Therefore, if today's close is greater than yesterday's close then the day was an "up day"; and if today's close is less than yesterday's close, then it is a down day. To illustrate why the prior day's close to today's close is superior to the today's open and close, an example is given: The previous day's close is $10, today's open is $15, and today's close is $12. Using the today's close minus today's open, the bar would have been a $3 down day ($12 - $15). However, today's close is $12 and yesterday's close was $10, which would mean today's price action gained $2 ($12 - $10). The gain of $2 is a far better representation of what would have happened if a person owned the stock, namely yesterday a person owned shares at $10/share and today they own shares at $12/share – the shareholder made money.
High - Close = Selling Pressure; Close - Low = Buying Pressure
The difference between the high and the close can be viewed as selling pressure because when prices reach the high price, buyers are unable to maintain sufficient buying pressure to keep prices that high all the way to the close. Therefore, sellers are able to come in and push prices down from the high to the close. The size difference between the high and close is important too. Were prices pushed down off the high a few cents or a few dollars? Similarly, the difference between the low and the close can be viewed as buying pressure because when prices reach the low price, sellers are unable to maintain sufficient selling pressure to keep prices that low all the way to the close. Therefore, buyers are able to come in and push prices upward from the low to the close. Again, the size difference between the low and the close signal the strength of the buying pressure at the lows. Is the difference a few pennies or a few dollars?
RANGE = High - Low
The High price minus the Low price is called the range. Range can tell you the importance of a bar. For instance, if the average daily range for a stock price is $1, then a price bar with a range of 25 cents is rather unimportant; however, if a price bar was $5, then this particular price bar is very important and attention should be paid to it.
Volatility = Personality of Market
Range is a sign of volatility. Volatility equates to uncertainty. Range volatility can be a description of the personality of the stock: Are the price ranges small and the uptrends and downtrends orderly or are the price ranges large and the price movements erratic? Is the stock price range large enough to make any profit from moves even after slippage and commissions? Are the price ranges large and unpredictable enough to take out a trader's stop losses before making the expected price move?
Typically, the definition of a trend is based on the relationship of highs and lows; therefore, if over time prices have higher highs and higher lows, then price bars are moving in an uptrend. See the trendlines page for more information on creating uptrend trendlines and the buy and sell signals associated with those trendlines.
If price bars have lower highs and lower lows, then price bars are moving in a downtrend. See the trendlines page for more information on creating downtrend trendlines and the buy and sell signals associated with those trendlines.
End of UpTrend
After a series of higher highs and higher lows creating an uptrend, when price bars make a lower high and lower low, this could be a signal of a potential reversal of price action. Typically, these reversal bars with lower highs and lower lows should make a drastic break from the prior uptrend to be considered valid. See the chart example at the end of this page for a real life example.
End of Downtrend
After a series of lower highs and lower lows that create a downtrend, if price bars make a higher high and higher low, this could be a signal of a potential reversal of price action. Typically, these reversal bars with higher highs and higher lows should make a drastic break from the prior uptrend to be considered valid. See the chart example at the end of this page for a real life example.
UpTrends & DownTrends Bar Chart Example
The chart above of the Dow Jones Industrial Average ETF (DIA) illustrates many aspects of the bar chart. First, since this is an average of 30 stocks, the price ranges tend to be moderate and consistent in size and the price movements tend to be orderly. Second, this chart shows that uptrends are created from sequential price bars with higher highs and higher lows and that downtrends are created from multiple price bars in sequence with lower highs and lower lows. Also, transitions from downtrend to uptrend often occur when a price bar with a higher high and higher low comes after a downtrend; transitions from uptrend to downtrend often occur when a price bar with a lower high and lower low comes after an uptrend. Typically, the completed transition from downtrend to uptrend occurs when prices with a higher high and higher low break above the downward sloping resistance trendline (the first and third [from left to right] orange lines). In contrast, the completed transition from uptrend to downtrend occurs when prices with a lower high and lower low break below the upward sloping support trendline (the second and fourth [from left to right] orange lines).
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