Let’s have a look at the three most popular types of trading charts:
The three most prominent types of charts are line charts, bar charts, and candlestick charts.
Now that you know the different charts, let’s get to the importance of each.
A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.
A very simple version of these charts draws a line that connects all of the various closing prices. The line is a great indicator of the price movement of a pair of currencies over time.
Here is an example line chart:
A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.
A bar chart has a little more to it. Bar charts show both the opening and the closing prices of each day. They also show the highs and the lows. The bottom of the bar is the lowest price of a given time and the top is the highest.
The actual bar shows the whole range for any given time.
The small horizontal mark on the left of the bar is the opening price and the one to the right is the closing one.
Here is an example of a EUR/USD bar chart:
Remember that through all of the lessons to come, the word ‘bar’ will stand for a single unit of data on a chart.
Each bar is a simple segment of time, it could be a day or an hour. When you see the word ‘bar’ mentioned, make sure you understand what time frame it is being used in.
OHLC charts are another name for bar charts. They have this name because they keep track of the opening price – the high, the low, and the closing price.
Open: The line to the left of the bar is the opening price.
High: The very top of the bar is the overall high for that time frame.
Low: The lowest point of the bar is the overall low for that time frame.
Close: The little line off to the right is the closing price for that time frame.
What are Candlestick Charts?
Candlestick charts show the same information as a bar chart, but in a prettier, more graphic format.
Candlestick charts are basically a nicer looking version of a bar chart.
They indicate all of the same things that bar charts do – a high, a low, and the opening and closing prices.
The actual body of the candlestick shows the opening and closing prices. If the body is black, the opening was higher than the closing. If it is empty, then the opening price was lower than the closing.
So, if the body is black then the top line of the body is the opening price and the bottom is the closing. If it is clear or white, then the bottom is the opening and the top is the closing.
Candlesticks show high and low prices with upper and lower vertical lines, also known as shadows. The upper shadow or the top vertical line, is the high for the time frame, and the lower vertical line or the lower shadow, is the low for the time frame.
As long time traders, we have grown tired of the traditional black and white candle colors. Instead of the black color, we have substituted red, and instead of the traditional white, we used green. We thought these colors made fitting substitutions while helping to keep things a little more interesting.
If the closing price is lower than the opening, you will see a red candlestick. On the other hand, a closing price higher than the opening will be connected to a green candlestick.
Later on, you will come to realize that the colored charts are much faster and easier to read than the black and white ones are.
For the moment, just keep in mind that green means white and red means black.
The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart.
Now that you know why candlesticks are so cool, it’s time to let you know that we will be using candlestick charts for most, if not all, of chart examples on this site.
Candlestick charts were created as a visual aid. They help you pick the important data out much faster than you would be able to with a bar chart. The advantages of candlesticks are as follows:
It is easy to interpret what a set of candlesticks means, which makes it easier for beginners to jump in to chart analysis.
Research has shown that the use of visual aids helps people study, the patterns jump out readily and it should be easier to understand what is going on.
Candlestick patterns have the coolest names (like shooting star) which make them more fun to use than traditional charts.
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