Forex Basics: Types of Charts

Takeaway: Experiment with different ways of displaying price action to find the one that fits your trading style.

Whether you are trading on fundamentals or technicals, currency trading inevitably involves looking at charts. In this article, we’ll look at the three most widely used chart types and their strengths and weaknesses. (Wondering what time frame is right for you? Check out How To Choose Your Time Frame.)

The Line Chart

Line charts are a common type of chart in general, not just in forex trading. A line chart is just a series of data points connected by line. A forex line chart uses the closing price at each time interval and draws a line to connect all of them. A typical line chart looks like a mountain range as it plots and connects each closing price.

Line charts are very basic, so they can help filter out noise. A trader can also adjust the line chart to plot a different data point - such as the open or average price instead of the close - or plot multiple lines on the same chart. Typical single line charts only show the closing price for each point, making it difficult to interpret much more than the basic direction of price action. To get a reading on the strength of a pattern, traders usually want more information - not less. Multiple lines can be added to address this, but there are other charting solutions as well.

The Bar Chart

A bar chart shows much more information than a single line chart. At first glance, the general shape of a bar chart will look like a line chart. However, a closer look will show that the "line" is made up of vertical bars at each interval and do not touch. Each vertical bar will have two small horizontal lines - one jutting to the right and one to the left. In this manner, the bar chart shows a trader the open, close, high and low for each time interval. Reading a bar is relatively simple:

• The horizontal line sticking out on the left records the opening price
• The horizontal line to the right records the closing price
• The vertical bar shows the high (the upper end) and the low (the lower end)

The bar chart provides all the important information that a trader needs, but it is not exactly easy-to-use. You have to look carefully at each bar to get the meaningful data because the opening and close are hard to see at a glance. Fortunately for traders, there is another chart that provides the same information in a more graphical format.

The Candlestick Chart

A candlestick chart takes all the information that a bar chart displays and adds color into the mix to make it easier for traders to glean important information visually. A candle stick chart has the same basic elements of the bar chart, including the high, low, open and close. However, in a candlestick, the information is displayed differently.

Instead of horizontal lines to the left and right for the open and close, these are displayed as the top and bottom of a rectangle that makes up a candlestick’s body. Of course, this brings up the issue of not being able to tell which is the close and which is the open - this is where color comes in. If the close is higher than the open, the body is displayed white (hollow). If the close is lower than the open, the body of the candlestick is colored black. In this way, the color-coding of candlesticks can help traders see the information much more quickly than a bar chart. Moreover, the colors can be adjusted to match a trader’s preference. Black and white are traditional choices, but red and green have become a popular alternative.

There will also be vertical lines that represent the high and low on either end of the candlestick, and these are known as the wicks. Alternatively, wicks may be called shadows and referred to as the upper shadow and lower shadow.

Beyond the coloring, the thickness of the body also helps a trader to see the length/size of an increase or decrease along with the low and high. These visual displays have led to individual candlesticks being assigned nicknames in addition to the patterns they form.

Charting a Course

The line chart, bar chart and candlestick chart are the most commonly used charts in forex, but they are not the only ones. There are still other alternatives like the point and figure chart as well as combination charts like the ichimoku. A majority of forex traders may use the candlestick charts, but that doesn’t mean you have to. Experiment with different ways of displaying price action to find the one that fits your trading style. (New to Forex? Check out The Top 10 Mistakes That First Time Forex Traders Make.)