Bar Graph Definition
What Is a Bar Graph?
A bar graph is a chart that plots data using rectangular bars or columns (called bins) that represent the total amount of observations in the data for that category. Bar charts can be displayed with vertical columns, horizontal bars, comparative bars (multiple bars to show a comparison between values), or stacked bars (bars containing multiple types of information).
Bar graphs are commonly used in financial analysis for displaying data. A stock volume chart is a commonly used type of vertical bar graph. A histogram is an example of a bar graph used in statistical analysis that depicts a probability distribution in some data or sample.
Understanding a Bar Graph
The purpose of a bar graph is to convey relational information quickly as the bars display the quantity for a particular category. The vertical axis of the bar graph is called the y-axis, while the bottom of a bar graph is called the x-axis.
When interpreting a bar graph, the length of the bars/columns determines the value as described on the y-axis.
The x-axis could be any variable, such as time, or the category that is being measured, such as earnings per share (EPS), revenue, and/or cash flow. In trading, bar graphs are often used to depict trading volume and will appear in a panel below a security's price chart.
Bar Graph Features
A typical bar graph has a label or title, x-axis, y-axis, scales or increments for the axis, and bars. Some graphs may also have a legend that specifies what various colors represent, such as in a stacked bar graph.
Bar graphs are ideal for comparing two or more values, or values over time. Data is displayed either horizontally or vertically. Single bar graphs are used to convey discrete values of an item within a category. For instance, a bar graph could display the number of males with a certain trait for specific ages. The discrete value, or the number of instances in which an individual has a certain trait, is displayed by varying the length of the bar. More instances mean a longer bar, and fewer instances mean a shorter bar. In this example, a different bar is established for each age or age group.
In technical analysis, a volume chart shows how much volume there was on each particular day. The x-axis shows days, while a bar extending up from that day shows how much volume there was per the y-axis.
When a graph has a well-defined zero point and the data set has both positive and negative values in relation to this point, bars can still be displayed. Bars above the zero line typically represent positive values (check the scale) while bars below the zero line typically show negative values.
Data can be displayed horizontally or vertically. To switch the orientation, the x- and y-axis are switched.
Types of Bar Graphs
Grouped Bar Graphs
Grouped bar graphs, also called clustered bar graphs, represent discrete values for more than one item that share the same category.
A bar graph could display the number of individuals, male and female, with a certain trait for specific ages. The aggregate number of instances could be combined into one bar. Alternatively, the instances could remain segregated by gender; one bar for all male instances and one bar for all females instances would be placed side by side for each age or age group.
Stacked Bar Graphs
Stacked bar graphs or composite bar graphs divide an aggregate total into parts. These parts are typically identified by utilizing different colors for each section. In the example above, the aggregate of instances for both males and females may be combined into one bar but the bar may be divided into multiple sections represented by different colors.
Stacked bars require a legend or specific labeling to identify what the various parts of the bar are showing.
Bar Graphs in Technical Analysis
Some forms of technical analysis utilize bar graphs. For instance, traders may employ a moving average convergence divergence (MACD) histogram, which is a popular technical indicator that illustrates the difference between the MACD line and the signal line.
The following daily chart of Apple Inc. shares shows three types of bar graphs.
Along the right is price by volume, a type of horizontal bar graph which shows volume dispersion based on price.
Along the bottom of the chart, volume is a type of vertical bar graph that shows bars representing the number of shares traded per day.
Finally, the MACD histogram shows the separation between the MACD and the signal line. When the histogram crosses the zero line it means the MACD and signal line have crossed, which some traders use as a trade signal.
Bar Graph vs. Bar Chart
A bar graph shows data in columns, while a bar chart is a technical analysis term describing the display of the open, high, low, close (sometimes the open is omitted) prices for a particular security during a specific time period using a vertical bar. Small horizontal lines extend to the left and right of the vertical bar to show the open and close prices.
Unlike the bar graph, the price bar only covers relevant prices and does not extend all the way up from the x-axis.
Limitations of the Bar Graph
A bar graph is a way to display information. How the data is chosen to be displayed could affect its interpretation. For example, if too large of a scale is chosen, then the data may appear insignificantwhen in fact it could be very significant, but the scale doesn't allow for an appropriate comparison.
Bar graphs may also make data look compelling when it actually could be lacking substance. As with all data, verify the source it comes from, and make sure it is from a large enough pool or sample.
For example, looking at only a few days worth of volume data in a stock doesn't provide much relevant information. Yet looking at how recent volume compares to volume over the last year will provide a technical trader with more information for analyzing the volume.