Types of Trading Charts Explained

There are several types of trading charts that a beginner trader tries to learn in order to read and interpret price on the chart, depending on their own trading strategy. There are three main chart shapes used across trading platforms in general, and understanding them helps you make sound trading decisions.

The Basic Types of Charts

There are three basic shapes and types of price charts used in trading, or in forex.

1. The line chart
2. The bar chart
3. The candlestick chart

Definition of the Forex Line Chart

The line chart connects a number of data points and is used by investors regularly to track closing prices. It’s one of the easiest and simplest chart types, and it can be applied to any timeframe, since a single line is formed from this type of chart.

This is done by summarizing prices for each time period within its own frame. Even so, it doesn’t give much insight into price movements and fluctuations during the day, since it only plots closing prices. Traders use line charts on the basis that the closing price matters far more than the opening price.

Advantages of the Line Chart

This chart is considered smooth and easy, and it stands out for its simplicity and directness. One of its biggest advantages is how easy it is to use for investors or novice traders who are just starting out. This chart, known as the line chart, lets an investor see price behavior and movement, making it easy to mark support and resistance levels and identify the pattern being drawn.

Disadvantages of the Line Chart

One of the biggest drawbacks of line charts in general is that they don’t include as much data compared with other chart types. On the chart, you can see the price of a currency for a past time period within the current timeframe, but not what happened during the day itself. At the same time, the chart never shows gaps in prices, because a line connects Friday’s closing price directly to Monday’s opening price.

Definition of the Bar Chart

This type of chart is used to visualize price fluctuations in currencies, and it’s also placed within analytical frameworks. It’s quite restrictive for illustrating market fluctuations and estimating upcoming price swings, and this is done through the bar chart. Each bar contains four price values: close, open, high, and low. You can color each bar to distinguish between bear and bull markets — the market is bullish when the close is higher than the open, and bearish when the close is lower than the open.

The relationship between the open, the high, the low, and the close forms shapes that let the person watching the chart gauge the strength driving that time period, and get a sense of who is in control of the price. This is easy to read on a bar chart.

The Basic Shape of the Bar

A single bar can hold as much data as possible to explain price fluctuations over a given period, giving you, as a trader, a sense that you’re in control of that time period once you’re familiar with the main shapes. A reversal bar closes near where it opened, but to a greater or lesser degree it may not sit close to either the close or the open.

An inside bar sits within the range of the previous bar, and it’s a sign that volatility is dropping. You can identify a series of these bars in a row, and they’re usually a correction to the previous move. An outside bar, on the other hand, extends beyond the range of the previous bar, which is a strong sign that volatility is rising — outside bars tend to be driven by momentum even though they don’t last long.

Advantages of Bar Charts

Bar charts are useful and clearly show rises and drops in momentum when the open and close are far apart, indicating the size of the move — and the opposite is also true. When the close and open are close together, this signals a weak move, and it points to the highs and lows on the chart, which help in evaluating volatility.

Disadvantages of the Bar Chart

For novice investors, reading bar charts can end up feeling complicated, which is the opposite of line charts. In that case, it’s possible to use candlestick charts instead, since they include a lot more price data and information.

Definition of the Forex Candlestick

This type of chart is made up of Japanese candlesticks. The solid part is called the body, while the long lines that appear above or below the body are called the shadows, or wicks. The upper shadow points to the highest level reached, and the lower shadow points to the lowest level reached. A black (filled) candle indicates a bearish move, while a white (hollow) candle indicates a bullish move.

In short, types of trading charts are a series of prices plotted over a given timeframe. On the chart, the vertical axis represents the price scale and the horizontal axis represents the time scale. Prices are shown from left to right along the horizontal axis, with the most recent price movement appearing at the far right.

Although technical analysts use types of trading charts almost exclusively, chart use isn’t limited to technical analysis alone. Charts can also be highly useful for fundamental analysts who trade using fundamental data, thanks to their easy-to-read graphical representation of a security’s price movement over a set period of time.

The historical record of types of trading charts helps identify the impact of major economic and non-economic events on a security’s price, and it lets you assess its performance over a given period, and whether it’s trading near its highs and lows, or somewhere in between.

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Read more: What Is the Truth About Trading, in 11 Points?

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