Learn about different types of charts, their respective strengths and weaknesses, and how you can use them to improve your trading experience.
In this lesson, you’ll learn:
Technical analysis focuses on predominantly on the use of charts. To begin analysing charts, it’s crucial to understand what type of charts can be used to predict market movements and how different charts are built. The three most popular types of charts are:
Line charts are arguably the simplest form of charts when it comes to the financial markets, used in the past by stock traders. They are based on the lines that are drawn from one closing price to the next closing price. Such a chart is an easy way to show the general price movement of a market over a specific period of time. Because of their simplicity, line charts also help to recognise technical patterns and are often preferred by beginners. If you’re looking to start out on the financial markets, practicing with line charts is a good place to start.
Unlike line charts, which only provide closing prices for an instrument, bar charts provide opening and closing prices as well as the highs and lows for that period. The bottom of the bar shows the lowest traded price for the chosen period of time, while the top indicates the highest price that was paid. The whole bar represents the trading range from the specific period of time. Opening and closing prices are represented by horizontal marks to the left and right of the vertical bar, respectively.
There are two types of bars that can appear on the chart. A common method of classifying the vertical bars is to show the relationships between the opening and closing prices within a single time interval as either bull (rising) or bear (falling) bars, as seen below.
Bar charts present the data individually, without linking prices to neighboring prices. Each set of price fields is a single island and shows how the price has behaved during a specific period. Recognising trading patterns may a bit more complex compared to line charts, but bar charts provide you with all the necessary information about a time interval.
Similar to bar charts, candlestick charts present the same information, but are arguably visually more accessible. Similar to the bars, candlesticks refer to the high-to-low range with opening and closing levels. The highest price is indicated by an upper shadow, while the lowest is shown by the lower shadow. The longer the body is, the more intense the buying or selling pressure. That means that the longer the body is, the bigger change in price there was. Conversely, short candlesticks indicate little price movement and represent consolidation (a period when the market remains calm).
The only difference is the construction of the body. In the bar charts the opening and closing levels were illustrated by the horizontal marks to the left and to the right. In candlesticks it is the body (the middle) that shows if it was a bullish (rising) or a bearish (falling) candle. Typically if the body is black that means that the currency or a CFD closed lower than it opened. On the other hand, a white candle represents a bullish move (the price closed higher than it opened). Nevertheless, it’s worth remembering that these colours vary across different platforms and you can adjust them in both xStation 5 and MT4.
Compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy to interpret picture of price action. Immediately a trader can compare the relationship between the open and close as well as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks.
What works for you?
As you can see, there are three types of charts that are used by traders. Each of them has its own advantages and disadvantages. To become a successful trader you should use the one that suits you most. Beginners may start with line charts and basic trading patterns, while more advanced traders may use candlesticks to develop their trading strategies. What’s more, you could also find other charts like Heikin-Ashi on our trading platforms.