Intro to Basic Chart Types
By: Christopher Lewis
When trading the Forex markets, or many other markets for that matter, there are three basic chart types. I should be pointed out that there other types of charts available, but almost all of the charts you are likely to run across during your trading career will be one of these three.
The most basic and simple chart available is a simply line chart. This chart shows the most rudimentary of information as it is simply a plotting of closing prices on a chart as represented by a solid line. The vertical axis will be price, and the horizontal axis will represent time. This in fact, is true of all of these three plotting methods.
The line chart is an excellent way of seeing the basic price action in a financial instrument. It is the least technical of these three methods, so it tends to be used more by fundamental traders as it doesn’t allow enough information to make it a strong candidate for technical analysis.
As you can see from the USD/CAD chart above, this method is very simple, but effective in the sense that you can easily tell the overall trend in this market, and where price has closed. Beyond that though, there is very little information.
The next type of common charting style is known as a bar chart. The bar chart offers much more information than the line chart as it not only plots the closing price, but the opening, high, and low of a specific unit of time as well. Because of this feature, you can get a better read on what has happened during a particular timeframe in a market.
The bar is very simple to read. The middle line is the entire range of the session, so the top is the highest price reached while the bottom is the lowest. Adding to the informative nature of this chart is the fact that there are two ticks, one on the left and one on the right. The tick mark on the left shows where price opened for that time period, and the one on the right shows the closing price. While this may not sound like that big of a deal, the truth is that it will often show the true “attitude” of the markets as it shows how the general trading population acted during this time period.
As you can see on the bar chart above, the information that you receive is greatly expanded. Included in the chart is a magnified representation of the bar itself. Because of the fact that bars show the opening price, high of the session, low of the session, and the closing price, they are sometimes referred to as “OHLC bars” on a trading platform. The beauty of using these charts is that they can be plotted on many different timeframes, and each one of these bars can tell you specifically what happens per unit of time in a market. For example, on a daily chart each one of the bars will represent a 24 hour period of time in the marketplace, and you can often glean quite a bit of information based upon reactions to announcements, support and resistance, or many other technical factors.
The third type of chart that is most commonly used it the candlestick chart. Tracing its origins back centuries in Japan, these candles are sometimes referred to as “Japanese candlestick charts”. However, in the last couple of decades, the candlestick chart has become more and more accepted in the West as well, meaning that the term “Japanese” isn’t as used as much as it once was.
The candlestick chart gives the exact same information as the bar chart. There is an open plotted, a high, a low, and a closing price plotted as well. However, there is one major difference: the range between the open and close is colored as well. This area is known as the “body”, and it can tell traders at a glance how the session finished, be it positive, unchanged, or negative. This is one of the biggest advantages to using candlestick charts is the simplification of figuring out the underlying attitude of the market.
This kind of chart offers the trader the ability to see right away what direction the market is heading overall. The body of the candle is normally colored green for a positive session and red for a negative one. They are also done with white being positive and a dark color such as black or blue being negative as well at times.
The high and low of a session on the candlestick chart is represented the “wicks” of the candle. Essentially, this format is simply the same exact thing as the bar chart, except the effective open to close range offers a quick reference whether or not the market gained or fell.
Truthfully, a good trader can back and forth between bar and candlestick charts seamlessly, and the differences aren’t nearly as profound as some would have you believe. After all, both of these charts offer the exact same information and although the candlesticks are known for having specific patterns that technical traders like to use, bar charts have their equivalents as well. In the end, it is purely a personal preference as to which one of these kinds of charts to use, and there are successful traders using all three of these types.