The objective of analyzing trading charts is to determine the trend direction whether it is an uptrend or downtrend and to assess the volatility of an asset. Trading charts play an important role in technical analysis within the trading market, serving as the foundation of the entire study. For example, it displays essential information to assist traders in determining the optimal times for entering and exiting a position.
By observing data plotted in a specific direction, traders can identify an overall direction that the price is moving towards. However, some trends can be challenging to identify, that is why traders often utilize multiple chart types to conduct more detailed analysis. There are various types of trading charts, including candlestick charts, bar charts, line charts, and so forth.
1. Candlestick Charts
A candlestick chart, commonly known as K-line chart, is constructed by plotting the open, high, low and close prices for each analysis period. Candlestick charts are widely preferred among traders due to their ability to convey detailed information within each candlestick. For instance, candlestick charts help traders quickly assess the current state of the market. Just by looking at the length and colour of the candlestick, traders can determine instantly if the market is strengthening (becoming bullish) or weakening (becoming bearish).
The chart below illustrates the application of a candlestick chart in the EUR/USD pair.
Source: Investing.com
How to Read a Candlestick Chart?
Candlestick charts use a visual representation of price that is divided into two primary components, the body and the wick. These components come together in a style that resembles a candle, hence the chart's name.
The candle body, a rectangular area of the candlestick. It represents the price range between the opening and closing prices during that period. If the closing price is higher than the opening price, the candle body is typically with green or white, indicating a bullish (upward) movement. If the opening price is higher than the closing price, the candle is with red or black, indicating a bearish (downward) movement.
Candle Wick, the thin lines extending above and below the candle body are called "candle wicks" or "shadows." These wicks represent the price range between the highest and lowest prices during the specified time.
Each candlestick provides you with four key pieces of information within a chosen time frame.
Open price: the first price traded during the formation of the new candle. If the price begins to move in an upward direction, the candle will change its colour to green or white. Conversely, if the price decreases, the candle will change to red or black.
High price: The highest price traded during the period is indicated by the top of the upper wick or shadow. If there is no upper wick or shadow, it means that either the open price or the close price was the highest price traded.
Low price: The lowest price traded during the period is indicated by the bottom of the lower wick or shadow. If there is no lower wick or shadow, then the lowest price traded is the same as either the close price or open price in the case of a bullish candle.
Close price: The close price is the last price traded during the period of the candle formation. If the close price is below the open price the candle will turn red or black as a default in most charting packages (bearish candlestick). If the close price is above the open price the candle will be green/white (bullish candlestick).
2. Bar Charts
There are similarities between bar charts and candlestick charts, which also provide four crucial pieces of information for trading. It demonstrates the opening price, the highest and lowest prices during the period, and the closing price. This information allows traders to easily understand what is happening within a specific time frame. For instance, the highest level of a bar chart represents the day’s highest price, while the lowest represents the day’s lowest price.
The chart below illustrates the application of a bar chart in the EUR/USD pair.
Source: Investing.com
How to Read a Bar Chart?
1. High and Low Prices
The top point of the vertical line represents the highest price recorded during the specified time frame, while the bottom point represents the lowest price observed.
2. Left Dash (Open Price)
On the left side of the vertical line, you'll find a horizontal dash extending to the left. This dash represents the opening price at the beginning of the trading period.
3. Right Dash (Close Price)
Conversely, the horizontal dash positioned on the right side of the vertical line represents the closing price at the end of the trading period.
Line Charts
Among various chart types, the line chart is the simplest and most basic type. And, simplicity is its greatest feature. A line chart is usually easy to identify, the interpretation of it is very clear. They are formed by directly connecting a series of price data points and displaying only the closing price. Besides, line charts are considered less useful for trading, especially by day traders. This is because the chart provides limited information. It does not show important details such as open, close, high, and low prices, which are useful in sending signals.
The chart below illustrates the application of a line chart in the EUR/USD pair.
Source: Investing.com
All the charts described above are drawn based on the bid price. When executing a buy order, you will notice a difference between the price you have been filled and the visual price displayed on the chart. This is because buy orders get executed at the ask price, while charts only show the bid price. Therefore, you should not rely on them to determine where the ask price was at any given time.
The choice of trading chart depends on the level of experience and the complexity of the trade. For example, it is more suitable for beginners to use line or bar charts, whereas those with a deeper understanding of the markets might prefer candlestick charts. No matter which type of visual representation of price a trader uses, candlestick, bar and line charts are all helpful in finding important clues to identify whether the market is trending.
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Test Your Knowledge
What information do candlestick charts show traders?
Open price and close price
High price and low price
Open price, close price, high price and low price
Average price