Different forms of forex charts and advantages vs. disadvantages of each.
Forex charts come in three main forms and each has their own distinct look and feel as well as advantages and disadvantages. We will discuss the various charting formats in the following article and give you some thoughts on which one is the most useful. The three chart forms are the line chart, the standard bar chart, and the Japanese candlestick chart. Each charting format has a role to play in the Forex Techniques you use to trade the market with.
• The Line chart
The line chart, as depicted above, is one of the easiest ways to get a good overview of price movement and trending vs. consolidating market conditions. The chart above is a daily chart of the Euro, and from this chart we can see that the line chart is constructed by connecting the close of one period to the next by a line.
An advantage to drawing charts in this way is that you get to see the movement of the closing price of the given instrument over time. Closing prices are typically considered the most significant by professional traders because they show the final price and whether or not the bulls or the bears were victorious for the given time frame. A disadvantage of drawing charts in this way is that you do not get to see the open, low, or high price paid for the given time period. This means you do not get to see valuable chart patterns which might show rejection of a significant level or trend reversals. While line charts can be a good tool to determine trend direction, they are not very good for shorter-term entry decisions as they simply do not convey enough information.
• Standard Bar Charts
Standard bar charts like the daily gold chart depicted above contain all the relevant price data that you need to formulate a successful trading plan. They contain the open, high, low, and close for each trading period. In this way you can implement all “western” technical analysis methods which derive their construction from these four pieces of data. There are also many simple one, two, and three bar patterns that can be used to trade off of effectively just off a “naked” bar chart.
A big advantage standard bar charts have over line charts are that they contain all four data prices for each period: the open, high, low, and close. This allows you to interpret rejection bar signals, and many other price action setups that form each day in the market. There are also many price-patterns such as triangles and head + shoulder reversal patterns that rely on the information supplied in a bar chart. A disadvantage to the standard bar chart is that sometimes the signals can a bit hard to decipher when compared to a Japanese candle stick chart, which we will discuss next.
• Japanese candlestick charts
Japanese candlestick charts are perhaps the most widely used charting format in the forex market today. There is good reason for this. Their filled or unfilled real-bodies give a very clear representation of whether the bulls or the bears were victorious for each given time period. They contain the same data the standard bar chart does; the open, high, low, and close, but in a much more visually rich and comprehensible format. Forex trading success depends upon your ability to correctly interpret price dynamics and the force behind them. Candlesticks give you a very easy to understand representation of the “force” behind each move, and therefore better highlight price pattern and price action setups which you may have otherwise missed had you not been using a candlestick chart.
The only real disadvantage of using candlestick charts is that their usage alone will not make you a consistently profitable forex trader. However, once you learn to correctly analyze and interpret the price messages conveyed on a candlestick chart, you will be much closer to reaching this goal.