October 16, 2017
Charts are an essential tool in forex trading. As you will spend a lot of time in front of charts, choosing the right chart type is crucial for success. There are three main types of charts when trading forex: the line chart, the bar chart and the candlestick chart.
The Line Chart
A line chart is made of a line which connects all previous closing prices. It’s a simple chart which only shows information about closing prices, and is usually only used to present the general movement of a currency pair. The chart above shows a line chart on the EUR/USD currency pair.
A bar chart shows more information about the price than a line chart. It shows the closing price just like the line chart, but gives additional information on the opening price, highs and lows for a time period. The chart above shows a bar chart on EUR/USD.
The height of a bar shows the trading range for the used time frame, the bottom indicates the lowest trading price, and the top indicates the highest trading price for that time frame.
Additionally, there are little left-side and right-side hashes on each bar. They represent the opening price (left hash) and the closing price (right hash) of the time period. As you can see, each previous closing price is the next bar’s opening price, unless in situations where gaps in price form due to extraordinary market events (a price gap is shown inside the red circle on the chart above). Bar charts are also called OHLC charts, because they show the Open, High, Low and Close of the price. The following picture shows how a bar chart is formed:
A candlestick chart is very similar to a bar chart; only it presents the price information in a graphically more appealing way. Just like the bar chart, the candlestick chart is also an OHLC chart – it shows the Open, High, Low and Close of the price in the time period.
The highest and lowest prices are presented by vertical lines on both sides of a candlestick, while the opening and closing prices are connected in such a way that they form the “body” of the candlestick. In the traditional way of candlestick charting, the body is filled or colored if the closing price is below the opening price (that is, the price went down). The following picture explains how a candlestick is formed:
The main advantage of using candlestick charts over bar charts is that they are very easy to understand and analyze. They are also easy to use for beginners, as you can immediately spot the price movement and what happened in the market. Candlesticks also form the very popular candlestick patterns, which can be used to determine entry and exit points in the market. You will learn more on candlestick patterns later, let’s introduce first the concepts of support and resistance in the forex market in the following article.
Test Your Knowledge: Different Types of Forex Charts
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The different types of forex charts!
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Which of the following is NOT a type of chart?Correct
A Line Chart has breaks that signifies gaps in opening and closing markets?Correct
The left hash on a Bar Chart represents which of the following:Correct
Which of the following is true of candlestick charts:Correct