Different chart types and their uses

Education / 5 Min Read
08 Dec 2020

Top 3 chart types every trader needs to know

Before charts came into being, traders only looked at the 'tape' or raw price movements to analyse the markets. It is called 'reading the tape'. But with the advent of charts, many traders have used charts for easy and graphical interpretation of market movements. Charts can also show patterns, trends and other visual signals that can help traders identify trading opportunities.

In this article, we will discuss the three most commonly used chart types that traders use, while also looking at some of their pros and cons. By the end of this article, you will be able to identify which chart types work (or don’t work) for you.

Different types of charts

There are many different types of charts used in Forex analysis. Depending on the trading style or type of analysis, one chart may serve you better than another.

The 3 most common charts are:

  1. Line Chart
  2. Bar Chart
  3. Candlestick

Line Charts

 

Line Charts are the easiest to read. It only shows you the close price at the given time period, typically represented by a continuous curved line that connects dots that represent the changes in price over certain intervals of time.

Line charts give a clear, simplified view of the current market situation. It works best for people who want a quick glimpse of where the market is heading.

Pros 

Cons

Simplicity

Easy to understand even for beginners

Does not show gaps

An example will be the price gap between Friday’s closing price & Monday’s opening price

Good for graphic analysis 

Straightforward depiction of support and resistance levels and easy to determine patterns

Does not give full information  

In comparison to the other charts, does not show other details concerning what happens during the day

Bar Chart


 

Bar Charts (or OHLC charts) are an upgraded version of the line chart, offering information on the Open, High Low and Close prices - hence the abbreviation. 

They are typically represented by a vertical line with 2 horizontal lines to its left and right. The two  horizontal lines depict the opening and closing price, while the top and bottom of the vertical line indicate the highest and  lowest price reached during the given time frame.

Bar charts can be used to represent any period of time, ranging from as little as a few seconds to a week or more.

Pros 

Cons

Comprehensive

Gives excellent view of the Open, High, Low, and Close of the price

Range dominates visuals

Open/Close level of each bar is harder to notice when the chart is full of bars

Provides insights into trends and patterns

Able to observe the contraction and expansion of price ranges during trends, over a given range of time 

 

 

Candlestick

 

Japanese Candlesticks (or candlesticks) are one of the most popular chart types used in Forex trading.

Candlesticks are made up of two separate parts known as the body and the shadows. The top and bottom of the body tell us the opening and closing prices during the given time period. The top and bottom of the shadows tell us the highest and lowest prices reached during the given time period.

The top and bottom of the candlestick body reflects the opening and closing prices in the given time period. 

Typically, if the closing price is lower than the opening price, the candle body will be red. If the closing price is higher than the opening price, the body will be green. 

In this case, red candlesticks tell us that price is declining, while open candlesticks tell us that price is increasing.

(Note: while red and green are the common colours to depict price movements up and down, these colours can be easily customised)

Why are candlesticks so useful?

Compared to line and bar charts, candlesticks capture the most information and depict the broadest picture of price changes over a fixed time frame. 

You can tell the emotions behind price movements -- e.g. long wicks can reveal strong support and resistance levels if observed on longer periods and can show violent movements within a single day.

Fun fact: The origin of Candlestick charts date back to 18th century Japanese rice traders, who came up with this chart for the purpose of analysing the rice markets.

Pros 

Cons

Comprehensive

Similar to bar charts, it gives an excellent view of the Open, High, Low, and Close of the price

Overwhelming

Might seem like an information overload to a beginner trader

Able to identify trends and connect the psychology with the price pattern

There is a full reference below of 1 bar to 4 par battens which helps traders make judgements on the future direction of price

 

Benefits of using charts

Familiarising yourself with the different chart types can enhance your trading as they deliver many benefits including:

  • Visual illustration of price movement which can help identify important trends and patterns
  • Help you spot entry and exit levels that may not be too obvious without a chart
  • Evaluate market sentiment and trader psychology represented in extreme price movements which are captured in chart patterns
  • Can be used in conjunction with fundamental analysis to confirm trade entry and exit levels
  • Historical perspective of price movement over different time frames

Final Thoughts

Now that we’ve explored all three types of charting, you should be able to identify which ones suit your type of analysis the best. 

While they all serve the same function - i.e. to indicate where price has been and currently is - there are pros and cons in each that could drastically impact the way you make your trading decisions.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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