Unveiling the Mystery: A Guide to Understanding OHLC in Stock Charts

OHLC has been recorded rather than actually calculated. The price at which a specific asset is traded for the first time on a given trading day is known as the "open." The highest and lowest prices for stocks traded during the day are referred to as the "high" and "low." The price at which the last deal of the day took place is known as the "close."

Here is a breakdown of how it works

Data Source

The process starts with historical price data for a security (stock, option, etc.). This data typically includes timestamps and various price points for each trading period. These price points might include:

• Open: The first recorded price at the beginning of the period.
• High: The highest price reached during the period.
• Low: The lowest price reached during the period.
• Close: The last recorded price at the end of the period.

Time Period Definition

You need to define the time period each data point in your OHLC set will represent. This timeframe can be:

• Daily 
• Hourly
• By minute
• Any other relevant timeframe for your analysis

Extracting OHLC Values

Once you have chosen time period and price data, can extract the OHLC values for each period

1. Open: Find the first recorded price (opening price) within your chosen time period.
2. High: Identify the highest price reached within the time period.
3. Low: Find the lowest price reached within the time period.
4. Close: Locate the last recorded price (closing price) within the time period.

Plotting OHLC Data

OHLC data forms the basis for bar charts used in visualizing stock prices. Here's how it translates into a bar:

• The vertical line of the bar represents the price range (high minus low).
• A horizontal line extends to the left from the vertical line, marking the opening price.
• Another horizontal line extends to the right from the vertical line, marking the closing price.
• The body of the bar (the thicker part) can be colored differently based on whether the closing price was higher (often green) or lower (often red) than the opening price.

Day Trader's Toolkit: Essential OHLC Strategies

OHLC plays a crucial role in many technical analysis approaches. Here's how OHLC data is used in trading strategies

Identifying Potential Entry and Exit Points

• Open High Low (OHL) Strategy

This is a simple strategy based on the idea that if a stock's opening price is the same as its highest or lowest price of the day, the price might reverse direction.

• Buy signal: When the open price equals the low of the day (potentially signaling an upward move).
• Sell signal: When the open price equals the high of the day (potentially signaling a downward move).
• Breakout Trading

By analyzing the high and low of a period (day, hour, etc.), can identify potential breakout points.  A breakout occurs when the price surpasses a resistance level (high) or falls below a support level (low), potentially indicating a significant price movement.

Understanding Market Sentiment

The relationship between the open, high, low, and close can provide clues about the market sentiment for a particular security.

• Bullish Signal: If the close is higher than the open, and the high is significantly above the open and close (wide bullish candlestick), it might indicate buying pressure.
• Bearish Signal: If the close is lower than the open, and the low is significantly below the open and close (wide bearish candlestick), it might suggest selling pressure.

Combining OHLC with Other Indicators

OHLC data is often used in conjunction with other technical indicators like moving averages, MACD (Moving Average Convergence Divergence), or RSI (Relative Strength Index) to create more comprehensive trading strategies. These indicators can help confirm signals derived from OHLC analysis or provide additional insights into market momentum and potential turning points.

Limitations of OHLC Strategies

• OHLC-based strategies are primarily focused on short-term price movements and may not be suitable for long-term investment decisions.
• These strategies rely on historical data and don't guarantee future performance.
• Other factors like news events, economic data, and investor sentiment can also significantly impact prices.

Overall, OHLC data is a valuable tool for technical analysis, but it should be used in conjunction with other indicators and risk management strategies for informed trading decisions.