Most traders have a workstation, where they analyze charts and, really if you boil it down, what they are doing is looking at historical price behaviour.
Charting is one of the very first — and one of the most important — tools that every trader must learn to use for technical analysis. It is a visualization of price action within a period of time.
Any asset or financial market with price data over time can be viewed as a chart for analysis. Charts are obviously visual tools and can be used to analyze a Forex currency pairs movements patterns and tendencies.
Harkening back to your algebra days, the vertical axis or Y-axis represents price, and the X-axis or horizontal axis represents time. Prices are plotted on the chart from left to right with the most recent price furthest to the right.
What Does a Price Chart Actually Mean?
A price chart is a representation of supply and demand, aggregating every buy transaction and every sell transaction of that asset. It incorporates all news, as well as traders’ expectations of future news. When reality is different from expectations prices may shift again. In the forex market, with so many players and so much currency in circulation, these charts are an amalgam of all activity from the millions of market participants.
The 3 Types of Forex Charts
The three most prevalent types of price charts are:
- Line chart
- Bar chart
- Candlestick chart
Line Chart
This is the simplest type of chart and a line graph that any middle school student should be able to recognize. It tracks one closing price to the next. The line that is formed visualizes the general price movement of a currency pair over a certain time period.
While it is the simplest version, it doesn’t give traders an insight into the price behaviour within the period. All traders know is that the price closed at this mark at the end of the period, without any insight into what happened within that period.
This type of chart is usually used to get a macro picture of price movement. It also lends itself to spotting trends, which is simply the slope of the line.
Bar Chart
A bar chart has an extra order of complexity, showing the opening and closing prices as well as the highs and lows. It helps a trader to see the price range within each period.
Bars can increase or decrease in size from one to the next. The bottom of the bar tells us what the lowest traded price for that time period was, while the top of the bar indicates the highest price within that time period.
The vertical bar itself tells us about the currency pair’s trading range. Increasingly volatile price fluctuations mean that the bars are larger. The converse is true, as well. As price action steadies, the bars become smaller. This fluctuation is due to the way each bar is constructed, with the vertical height of the bar reflecting the range between the high and low prices of the bar’s time period.
The bar also records the time periods of opening and closing prices with horizontal lines. The hash on the left side of the bar is the opening price and the hash on the right side is the closing price. See below for an example of a bar chart.
A bar is simply one segment of time. It can be a day, a week, an hour, or even a minute. Just make sure you know what time period each bar represents in order to properly read the chart.
Bar charts are also called OHLC charts because they indicate the open, high, low, and close for that particular currency pair.
The main difference between a line chart and an OHLC chart is that the bar chart displays volatility.
Candlestick Chart
A candlestick chart is simply a variation of the bar chart, showing the same price information but in a nicer, easier-to-read graphic format.
The candlestick bar still visualizes the high and low range with a vertical line, but the body of the bar is a block rather than a line.
Candlesticks are also different colours, usually red and green. That helps quickly visualize the bullish or bearish sentiment.
Usually, if the block in the middle is filled, coloured in, or red, then the currency pair closed lower than it opened.
If the closing price is higher than the opening price, then the body of the candlestick will be white, hollow, or green.
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