The 21st-century forex investor is lucky enough to have access to online trading and various trading platforms. With relative ease, a computer can print historical data, technical analysis, and all kinds of charts imaginable. It wasn’t always this easy. In fact, when technical analysis started, investors used pen and paper to record intraday moves. Speculation was so slow that investors needed to wait until the next day’s financial paper to see if they were right about the price of a specific stock. How times have changed! Nowadays, a trading platform, like MT4, not only offers charting as its main feature, but provides three types of charts with default settings: line, bar, and candlestick.
By far, the line chart is the least used type of chart by forex retail investors. As the name suggests, a line chart is simply a line. However, it is not any kind of line, but a line that connects the closing prices occurring during the specified timeframe. For instance, a line chart on the EUR/JPY daily chart looks like this:
Effectively, this line connects every day’s closing price. However, the setting can be easily changed, and investors may project a line chart connecting every day’s opening prices instead of closing prices.
- Advantages – it is a simple approach to technical analysis; it avoids the “noise” by eliminating highs and lows within a period and is easy to use with basic technical analysis tools (e.g. trendlines, channels).
- Disadvantages – investors may miss the price action within the period, it can be difficult to use with most trading theories, and divergences barely work because upper and lower swings are not visible.
Candlesticks come from the Japanese field of technical analysis and were quickly embraced by the Western world. Today, the Japanese candlestick techniques are known by investors worldwide due to their reversal potential and simplicity. A candlestick chart shows candlesticks representing the open and close levels, plus the highest and lowest points. What’s in between the opening and closing prices is known as the real body. The highest and lowest points are known as upper and lower shadows. It is, by far, the most commonly used chart type, and to understand why here’s the same line chart from earlier, but using candlesticks:
Red and green are the favoured colours to illustrate bearish and bullish conditions. Hence, investors know in a glance if the market is in a bullish or a bearish stance.
- Advantages – investors can use the multitude of strategies that come with the Japanese candlestick patterns, the chart offers a clear understanding of the price action within each candle.
- Disadvantages – sometimes investors get lost in the “noise” and price action of a candle.
Rarely used when charting the Forex market, a bar chart is quite similar to a candlestick chart. The next bar starts from where the previous one left off, with the opening level shown on the left side of the bar, and the closing level is shown on the right side.
Because it looks very similar to a candlestick chart, investors tend to ignore the bar chart and instead and prefer the advantages of candlestick patterns.
Other charts like Point and Figure (P&F) exist, but they are built using different techniques. Renko or Heiken-Ashi charts mostly belong to various trading strategies or theories and are not a type of chart per se.
- Candlestick charts are the most common.
- Japanese candlestick techniques mostly feature reversal patterns and are known for their simplicity.
- Typically, a line chart connects the closing prices in a timeframe.
- Bar charts resemble candlestick charts.