Forex Education


Types of Forex Charts: Line, Bar, Candle

ForexThe trading charts are the ‘primary’ way of studying the market conditions. And, analysis of the market properly will lead the trader towards devising a sound strategy that will in turn increase the profits of the trader. Candlestick chart is the most popular type of Forex trading charts and was first used by the rice traders of Tokyo in the 1700s. Besides this, line charts and bar charts are also widely used by the traders.

 

Line Charts

The most basic of types of Forex trading charts is the line chart. A line chart displays the closing prices within a certain timeframe. At first, the closing prices are plotted on the graph and then they are joined by a line. It represents where the price of an asset has journeyed over a given period. The line chart is known for clarity as it is not crowded by the open, high and low prices of an asset. This type of charts is particularly useful for the beginners as a large number of indicators when depicted on the charts can confuse the beginners and mislead them. The line charts clearly depict the support and resistance levels. The trader can also follow the trend of currency pair and understand the chart pattern easily.

The beginners should practice with the line chart and then move on to the more complicated ones like the Japanese candlestick chart. The beginners will best learn to apply the volume and moving averages if they start with a line chart. The experienced traders also use the line charts to best study the closing prices of an asset.

However, the traders may face some difficulty in devising a strategy when using the chart as they do not contain enough price information like the open price. For instance, the trader may decide to buy a currency if it has stayed above the high price of the previous 10 days. In these scenarios, the line chart will be rendered invalid.

 

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Line Chart

 

Bar Charts

The shortcomings of the line chart lead us to the bar chart. The bar chart usually displays the daily price range by adding the open, high and low prices of an asset. The chart consists of a number of vertical lines that depict the price range. Open and close prices are represented on either side of the vertical line with a horizontal dash. The opening price can be identified on the bar if the horizontal dash is on the left side while the closing price is represented on the right of the vertical line. The bar is coloured in black when the opening price is below the closing price and in the reverse situation the bar is depicted in red.

Bar charts are simple to understand and do not have a body. The traders can easily distinguish the highs and lows from the close and open prices of the asset. Many analysts and traders prefer the bar chart as they consider it to be literal and ‘less emotional’.

 

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Bar Chart

 

Candlestick Charts

The candlestick chart differs from the bar chart by that fact that the candles contain a “real body”. The real body is crucial in understanding the opening and closing prices of the currency pair. The trend of the market can be understood from the colour of the candles—black or red indicate the downward movement of the price and the green or white candles represent that the price of the asset has increased. The candles will develop shadows (tail or wick) based on the day’s low and high price. The shadow above the upper end of the candlestick signifies the high while the one below the lower end of the candlestick body denotes the low price. The candlestick charts are often considered to be the best method of deciding when to open or close a position, that is, enter or exit a trade.

The market is bullish when there is a strong presence of the green (or white) candles. But, if there is a strong presence of red candles then it is an instance of a bearish market. The pattern hammer is observed when the price of the asset falls much lower than the opening price and then rises up to close near the previous high price. This is an example of the bullish candlestick reversal pattern. In case it is a bearish candlestick reversal pattern, it will form the shape of a hanging man.

Two-Day Candlestick Formation: A number of short-term Forex trading strategies based on the candlestick patterns. In a two-day candlestick trading structure the first candlestick will have a small body and its consecutive (second) candlestick will sport a larger body. If this is observed at the end of a downtrend then, it denotes a bullish engulfing pattern. And, if is spotted at the end of the uptrend it is a bearish engulfing pattern. A reversal pattern or harami is seen when the first candlestick engulfs the second candlestick. If the harami cross has a doji candlestick in the second spot then, the open and the close are ‘equivalent’.

Three-Day Candlestick Formation: An evening star denotes a bearish reversal structure if the first candlestick maintains the uptrend. The second candlestick will then feature a narrow body. It will gap upwards. The third candlestick will show the close price below the midpoint of the first candlestick. But, if it is a morning star then it will signify a bullish reversal pattern. Here, the first candlestick will have a long body and the colour is red or black. It will be followed by a short bodied candlestick that will gap lower. The pattern will be completed by a white or green coloured candlestick that has a long body and will close beyond the midpoint of the first candlestick. 

 

edu candlestick chart

Candlestick Chart

Risk Warning: Trading may not be suitable for everyone, so please ensure that you fully understand the risks involved. Especially trading leveraged products such as Forex and CFDs carry a high degree of risk to your capital and can result in the loss of your entire capital. Only invest with money you can afford to lose.