Candlestick and Bar-Chart Representations

Bar-Chart Representation

Each "bar" in a Bar Chart represents the price variation during a certain period of time.
These periods can range from a few minutes to several weeks, depending on how the chart is being used.
The so-called daily period is the most commonly used.

The color of the bar can indicate whether the closing price is higher or lower than the opening price. In general, a green bar indicates an increase, and a red bar indicates a decrease.

Candlestick Representation

The Japanese have used candlestick presentation since the 17th century to track rice prices.
Candlesticks were introduced to modern technical analysis by Steve Nison in his book Japanese Candlestick Charting Techniques.

Candlesticks contain the same information as the classic bar chart presentation, but they also highlight the relationship between open and close prices.

The color of the candlestick body indicates whether the close price is higher or lower than the open price. In general, a green or white candlestick indicates an increase, and a red or black candlestick indicates a decrease.

The advantage of candlestick charts is that they reveal, better than bar charts, potential reversal patterns which, when they appear following a strong trend or near support or resistance levels, allow for the anticipation of upcoming reversals.

Interpretation

The succession of bars or candlesticks on the chart sometimes reveals price gaps, commonly known as "gaps." These are discontinuities occurring when the opening price of a period is significantly higher or lower than the closing price of the previous period, without any transactions having taken place between the two levels. This gap is characterized by a low that is higher than the high of the previous bar for an upward gap, or a high that is lower than the low of the previous bar for a downward gap.

Technical analysts say that a gap is "filled" when the price returns to the level of the closing price preceding the gap. The general rule is that a gap often acts as support (in an uptrend) or resistance (in a downtrend) once it has been formed.

Several types of gaps can be distinguished:

• Breakaway Gap: It generally appears at the end of a consolidation phase or after a reversal pattern. It marks the start of a new strong trend and is often supported by high trading volume. It is a powerful entry signal. These gaps are rarely filled quickly.

• Continuation Gap: It occurs in the middle of an already well-established trend. It shows an acceleration of the movement and indicates that investors are increasingly convinced by the current trend. It confirms the continuation of the trend and is often used to project price targets (the gap is often located halfway through the trend).

• Exhaustion Gap: It occurs at the end of a prolonged trend. It represents the final surge of investors before a reversal. It is often followed by a rapid drop (or rise) that fills the gap. It is a warning signal. If the price quickly returns to the gap level, it confirms a potential reversal.

• Common Gap: It occurs for no particular reason, often in illiquid markets or markets without a clear trend. It has no strong predictive value and is generally filled very quickly, often within the following days.

Note that gap analysis must always be corroborated by volumes and complementary technical indicators, as an isolated gap can sometimes be the result of sudden announcements (company results, macroeconomic news) and not an underlying trend.