Bar Charts

Bar Charts (also known as 'OHLC Charts') are a classic tool in the investor's visual toolkit, serving as a graphical diary of a stock's price movements over a specific period. Think of each bar as a single day's (or week's, or month's) dramatic story told in four key data points: the open, high, low, and close prices. The entire bar chart is a collection of these stories, strung together to reveal trends, volatility, and the general tug-of-war between buyers and sellers. Unlike a simple line chart that just connects the dots of closing prices, a bar chart packs in a wealth of information. It shows not only where the price ended but the entire battlefield of prices it fought through to get there. For students of technical analysis, these charts are the bedrock for identifying patterns and forecasting future price movements. While a pure value investing purist might scoff, even they can find utility in the clear, data-rich picture a bar chart provides.

At first glance, a bar chart can look like a series of random vertical lines with tiny wings. But each element tells a specific and important part of the story. Let's break down a single bar:

• The Vertical Line: The entire height of the bar represents the trading range for the period. The very top of the line is the highest price the security traded at, and the very bottom is the lowest price. A long bar signals a volatile day with a wide price swing, while a short bar indicates a quiet, stable day.
• The Left Tick (The 'Open'): This small horizontal dash on the left side of the bar marks the price at which the first trade of the period occurred. It’s where the story begins.
• The Right Tick (The 'Close'): This small horizontal dash on the right side marks the price of the final trade. It’s how the story ended for the period and is often considered the most significant price, as it represents the final valuation the market settled on.

Many charting platforms also color-code the bars for a quick visual cue. A green or black bar typically means the close was higher than the open (a win for the buyers, or “bulls”). A red bar means the close was lower than the open (a win for the sellers, or “bears”).

Bar charts and candlestick charts are like fraternal twins: they are built from the exact same four data points (open, high, low, close) but have a different look. A candlestick chart has a thick body (the 'real body') that represents the range between the open and close price, with thin lines (the 'wicks' or 'shadows') extending to the high and low. The body is typically colored green/white if the close is above the open and red/black if the close is below the open. Many traders find the thick, colored bodies of candlesticks more visually intuitive for quickly grasping the price action and identifying patterns. Essentially, it’s a matter of aesthetic preference, as the underlying data is identical.

If a bar chart is a detailed short story, a line chart is just the headline. A line chart is the simplest type of chart, typically created by plotting a series of dots representing the closing price of each period and connecting them with a line. This provides a clean, uncluttered view of the general trend over time. However, it completely ignores the intra-period drama—the highs, lows, and opening prices. You lose all sense of the day's volatility. For a quick glance at a multi-year trend, a line chart is great. For a more detailed analysis of what happened within each day, week, or month, the bar chart is far superior.

Let's be clear: bar charts are the home turf of technical analysts, who study price patterns to predict future movements. The hardcore value investor, in the tradition of Benjamin Graham and Warren Buffett, generally views this as something between a distraction and voodoo. Value investing is about calculating a business's intrinsic value through rigorous fundamental analysis—digging into balance sheets, income statements, competitive advantages, and management quality. The goal is to buy a great business at a fair price, not to guess the future direction of a squiggly line. Mr. Buffett famously said, “If the business does well, the stock eventually follows.” So, should a value investor toss charts in the bin? Not necessarily. While they should never be the reason to buy a stock, they can be a useful, supplementary tool.

Think of a chart as a map of market psychology, not a crystal ball. Here’s how a value-focused investor might use it:

• Context for Entry: After you've done your homework and determined that “Company X” is worth $100 per share but is trading at $60, you've decided what to buy. A quick look at a bar chart can help with when. If the stock has just plunged 20% in three days on panic selling (visible as long, red bars on high volume), it might be an excellent time to start buying. The chart helps you visualize the fear that creates the opportunity.
• Understanding Volatility: A bar chart gives you an immediate feel for a stock's historical volatility. Are the bars consistently short and stable, or are they long and wild? This can help set expectations and inform your position sizing. A stock that swings wildly might be one you buy in smaller increments.
• Spotting “Mr. Market's” Mood: Benjamin Graham introduced the concept of “Mr. Market,” a manic-depressive business partner who offers you different prices every day. A chart is a perfect visual representation of his moods. Long-term charts can show you periods of extreme euphoria (when prices get way ahead of value) and despair (when great companies are put on the clearance rack). For a value investor, the periods of despair shown on the chart are the ones to get excited about.

Ultimately, for the value investor, the chart is a secondary source of information. The primary work is analyzing the business. The chart simply provides a quick, visual history of the stock's price and the market's often-irrational reaction to it, which can sometimes help in executing a well-reasoned, fundamental decision.