What Is a Bar Chart?
Bar charts consist of multiple price bars, with each bar illustrating how the price of an asset or security moved over a specified time period. Each bar typically shows open, high, low, and closing (OHLC) prices, although this may be adjusted to show only the high, low, and close (HLC).
Technical analysts use bar charts—or other chart types such as candlestick or line charts—to monitor price action, which aids in trading decisions. Bar charts allow traders to analyze trends, spot potential trend reversals, and monitor volatility and price movements.
- A bar chart visually depicts the open, high, low, and close prices of an asset or security over 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 open and closing prices.
- Bar charts can be colored coded. If the close is above the open it may be colored black or green, and if the close is below the open the bar may be colored red.
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 marked 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, so it could 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 useful for a day trader but not an investor. A weekly bar chart, 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.
Interpreting Bar Charts
Because a bar chart shows the open, high, low, and closing prices for each period, there is a lot of information that traders and investors can utilize.
Long vertical bars show there was a big price difference between the high and low of the period. That means volatility increased during that period. When a bar has very small vertical bars, it means there was little volatility.
If there is a large 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, which may indicate more buying in future periods is forthcoming. If the close is very near the open, it shows there was not a lot of 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 toward the end of the period sellers came in. 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 typically represented by more red bars.
Bar Charts vs. Candlestick Charts
Bar charts are very similar to Japanese candlestick charts. The two chart types show the same information but in different ways.
A bar chart is composed of a vertical line, with small horizontal lines on the left and right that show the open and close. Candlesticks also have a vertical line showing the high and low of the period (called a shadow or wick), but the difference between the open and close is represented by a thicker portion called a real body. The body is shaded in or colored red if the close is below the open and shaded in or colored white or green if the close is above the open. While the information is the same, the visual look of the two chart types is different.
Example of a Bar Chart
The following image is a bar chart for the SPDR S&P 500 ETF. During declines, the bars typically get longer, showing an increase in volatility. Declines are also marked by more down (red) price bars compared to up (green) bars.
As the price rises, there tend to be more green bars than red bars. This helps to visually spot the trend. Even though there are typically red and green bars during an uptrend (or downtrend), one is more dominant. This is how prices move.
In order for the price to move higher within an uptrend, the price bars will need to reflect that by moving higher as well, on average. If the price starts moving lower, on average, by creating more red bars, then the price is moving into a pullback or a trend reversal.