Forex Calendar

Economic Calendar >> Add to your site


Tuesday, September 9, 2008

Types of Trading Charts

Let’s take a look at the three most popular types of charts:

  1. Line chart
  2. Bar chart
  3. Candlestick chart

Line Charts
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. Here is an example of a line chart for EUR/USD:

Bar Charts
A bar chart also shows closing prices, while simultaneously showing opening 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. So, the vertical bar indicates the currency pair’s trading range as a whole. The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.

Bar charts are also called “OHLC” charts, because they indicate the Open, the High, the Low, and the Close for that particular currency. Here’s an example of a price bar:

Open: The little horizontal line on the left is the opening price

High: The top of the vertical line defines the highest price of the time period

Low: The bottom of the vertical line defines the lowest price of the time period

Close: The little horizontal line on the right is the closing price

Candlestick Charts
Candlestick charts show the same information as a bar chart, but in a prettier graphic format. Candlestick bars still indicate the high-to-low range with a vertical line.

However, in candlestick charting, the larger block in the middle indicates the range between the opening and closing prices. Traditionally, if the block in the middle is filled or colored in, then the currency closed lower than it opened.

In the example below, the ‘filled color’ is black. For our ‘filled’ blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be “white” or hollow or unfilled.

I don’t like to use the traditional black and white candlesticks. I feel it’s easier to look at a chart that’s colored. A color television is much better than a black-and-white television, so why not in candlestick charts?

I simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green. If the price closed lower than it opened, the candlestick would be red. In our later lessons, you will see how using green and red candles will allow you to “see” things on the charts much quicker, such as uptrend/downtrends and possible reversal points.

The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:

  • Candlesticks are easy to interpret and it's a good place for a beginner to start figuring out chart analysis.
  • Candlesticks are easy to use. Your eyes adapt almost immediately to the information in the bar notation.
  • Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
  • Candlesticks are good at identifying marketing turning points – reversals from an uptrend to a downtrend or a downtrend to an up-trend. You will learn more about this later.

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.

There are three types of charts:

  • Line charts
  • Bar charts
  • Candlestick charts

  • “The best way to predict the future is to create it.”
    Peter F. Drucker

No comments: