Types of Charts in Forex Trading
While there are a multitude of different charts available to trade currencies, in this article I will be focusing on the three main ones that you see in the MT4 platform. They will be the simple line chart, bar chart, and the candlestick chart. They all have their various quirks, and of course pros and cons.
Line chart is simply a chart that’s representative of closing prices, drawn as a line on the chart. If you were to look at the structure of the chart, what essentially happens is that there is a dot that is plotted for every closing price for that period, for example a daily close, and then those dots are connected in order to place a line on the chart. This is the most basic of charts that you can find, as it simply shows you where the market closed at various days, but not necessarily how it got there.
That being said, it does show you what the trend is, whether a market has been rising or falling rather quickly. It doesn’t give you a lot of information, but if you are a trend following trader that is using multiple small positions, it might be enough. If you’re a fundamental trader, very often a line chart is enough as well. Below is an example of a line chart:
Bar charts are also a very common type of charting that you will see in the Forex markets, as they have been trusted by professionals for decades. They are particularly common for other markets such as the stock market in the commodity market, and many of the older traders out there continue to pay attention to them. Unlike the line chart, there’s more information than simply the close of the time-frame.
In the bar chart above, there is the exact same EUR/USD chart that we had looked at in the line chart. You will notice that each of the bars has a vertical line, with two horizontal “ticks” on each side. This is what makes the bar graph different than the line chart, and far more useful. The tick on the left-hand side of the | shows the opening price, while the one on the right-hand side of the bar shows the closing price. The | itself shows the high and the low of that bar, in this case that day. In other words, if the tick on the left-hand side is below the tick on the right-hand side, you know that the closing price was higher than the opening price. In other words, the worth of the asset has risen.
Over the last couple of decades, we have seen a surge of candlestick use, especially in the Forex world. Candlestick charts give you the exact same information as a bar chart, but they added color coding into the mix, allowing you to see the trend much quicker. If you have experienced trading, you can use either bar or candlestick charts to the same effect. However, candlestick charts are a bit simpler, as there is a “body” that is colored green or red, or sometimes white and black. If the candlestick is using the green and red color scheme, green means that during that timeframe, prices appreciated. Red of course means that prices fell. In the black and white color scheme, a white candlestick is positive, while a black candlestick is negative.
As I mentioned previously, this is the identical information you get from a bar chart. The top of the thick body of the candle stick is one of the tics that we see in the bar chart, just as the bottom of it is as well.
- The hollow or filled section of the candlestick is called the “real body” or body.
- The thin lines poking above and below the body display the high/low range and are called shadows.
- The top of the upper shadow is the “high”.
- The bottom of the lower shadow is the “low”.
The main advantage of using the candlestick chart is that if you see several green candles in a row, then it’s a quick way to glance at the chart and understand that we are in and uptrend. There are various candlestick patterns that people talk about, such as a “spitting top”, a “shooting star”,” bearish and golfing candlestick”, and many others.
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