This article is about Forex charts and their power. Over time, the best Forex charts changed. Traders use now OHLC bars, a line chart or a candlestick chart. And, it all started with the OHLC.
Before going into more details about different types of Forex trading charts, we should understand why they exist in the first place. What made traders want more than one type of chart?
After all, the information is the same. Right?
Well, yes and no. Technical analysis changed and will continue to change.
Things that worked in the past may or may not work in the future. For example, some time ago, a candlestick chart didn’t exist.
Or, if it existed, it wasn’t known to the Western world. Personal computers made it possible to switch to the various type of charts.
And, to use them for forecasting prices. As such, the best Forex charts are the ones that give a profitable trade.
Who cares what types of the Forex charts one uses? An OHLC bars strategy that generates a profit is as good as a line chart. Or, a candlestick chart.
The aim here is to show the difference between the types of charts. Moreover, outlining their advantages and disadvantages will lead to traders picking the ones that fit the most.
We’ll cover the following, but not only, topics:
- What OHLC
- How to interpret OHLC bars.
- Why traders use a line chart.
- What’s the benefit of using a candlestick chart?
- The most important candlestick chart patterns.
- What makes the best Forex charts.
At the end of this article, you’ll know what Forex charts to use. And why.
Moreover, you’ll find out why various types of charts exist. Again, it all started with OHLC…
OHLC Bars Charts
OHLC comes from open-high-low-close. Simple, isn’t it?
More exactly, it refers to the values of a predefined period of time. That’s the time frame.
A chart shows the price movement. That is, the price movement of a security.
When it comes to Forex charts, the way a currency pair moves. A chart shows the “traces” the pair leaves.
This is technical analysis. Or, its starting point.
For, this is why traders need Forex charts. To analyze a market.
In Forex charts analysis, the OHLC shows a range. The time frame tells it.
So, if you look at a bar chart Forex traders use on the four-hour time frame, that’s the range. Four hours.
It shows the time of the bar. Or, a candle, if you use a candlestick chart.
Therefore, an OHLC chart shows multiple bars. And, each bar represents a period of time given by the time frame.
As such, a five-minute OHLC bar chart will have bars that represent five minutes. A monthly OHLC graph shows the price action in a month. And so on.
Now you understand what a bar is. But still, what is OHLC?
OHLC – The Key to Reading Forex Charts
Powerful technical analysis concepts come from understanding a chart. Here’s a quick guide on how to read OHLC bars charts.
As mentioned previously, OHLC stands for open-high-low-close. Therefore:
- That’s the opening price of the bar period. When there’s no gap, it is the equivalent of the closing price of the previous bar.
- It shows the highest value in a bar. Or, the top.
- Naturally, it shows the lowest point. Or, the bottom.
- That’s the last price traded in a bar.
Below is the EURUSD four-hour bar chart. This is how OHLC bars look like.
The OHLC bars color shows the market direction. When the closing price is bigger than the opening one, the bar is green.
The market moved higher. It shows bullish activity.
A red bar shows the opposite. Bearish activity.
This happens when the closing price is lower than the opening one. This is how you read an OHLC bars chart.
In plain English is even simpler. The opening price appears on the left of a bar. And, the closing price on its right.
Traders have access to the OHLC data instantly. The MetaTrader platform allows hiding the OHLC indicator.
However, even if it doesn’t appear on the screen, the platform shows the values. Simply move the cursor over any bar. On the lower right corner, the trading platform will crunch the numbers.
We’ll use the OHLC chart explained here to illustrate a line chart and a candlestick chart too. This is the only way to spot the difference between different Forex charts and to pick the best Forex charts for your OHLC trading strategy.
Pros and Cons of an OHLC Bars Chart
It takes some time for traders to get used to reading a chart. Especially an OHLC bars one.
Because the Forex market moves rapidly, traders have difficulties integrating the move in a strategy. But, simple things work best.
And, if anything, bars Forex charts are simple. Remember the key: the open is always on the left. And the closing on the right.
One major advantage of these Forex charts is that trends are easy to spot. And ride.
On the other hand, any OHLC vs. candlestick comparison will end up with a candlestick chart winning.
The simplicity of an OHLC bars chart is its major weakness. Few strategies can be applied.
Plus, there are some trading theories that simply won’t work. Even though all the elements of a candlestick are there, OHLC bars chart are more difficult to read.
A candlestick chart analysis is more accurate. Profitable trades are easy to spot.
Yet there are traders that love bar charts. Especially traders that were in the business long before a candlestick chart appeared.
But what makes a candlestick chart so special?
How to Read a Candlestick Chart
Candlestick charts appeared for the first time in Japan. Because of that, the term “Japanese candlestick chart” is also used.
A candlestick chart is formed of…candles! Here’s a Japanese candlestick Forex traders use:
The bodies and shadows of each candle leave room for interpretation. The way they look was the source of Japanese candlestick charting techniques.
It is believed that Japanese charts were developed in the 18th century by a Japanese rice trader. Nowadays, best Forex charts analysis comes from Japanese candlestick patterns.
Not from a line chart. But, more about a line chart a bit later.
The secret of a candlestick chart comes from understanding the candles that form it. In a way, a candlestick chart resembles more an OHLC bars one than a line one.
The first two have many things in common. For starters, the OHLC itself.
Candles, just like bars, have an OHLC. Any trading platform shows it.
As such, to learn candlestick charts, one needs to learn the basics of a candle. Or, its OHLC.
The difference between OHLC bars and a Japanese candlestick Forex traders use is straightforward. Traders don’t interpret the shadow in OHLC bars analysis.
However, the shadow is an important part of any Japanese candlestick charting analysis.
The idea, however, is the same. A bar and a candle show the price activity in a time frame.
As such, there’s a five-minute candlestick chart, or a five-minute OHLC bars chart. And so on.
The Most Important Candlestick Chart Patterns
Technical analysis as we know it changed the moment a candlestick chart appeared. It is said that Steve Nison with its “Japanese Candlestick Charting Techniques”) introduced Japanese candlesticks to the Western world.
Traders embraced them wholeheartedly. Because they’re powerful patterns, they quickly become popular.
Understanding candlestick charts comes from experience. And, from knowing the patterns.
A trader should start from knowing these patterns mostly show reversal conditions. As such, they appear at the end of a trend.
This is in sharp contrast to what most traders believe. A general misunderstanding is that a candlestick chart shows trending conditions.
While it is a visual aid for a decision making, there are two things to consider:
- What is a candlestick chart?
- What is a candlestick pattern?
Understanding candlestick charts for beginners should start from here. For the two of them differ in every possible way.
Candlestick Chart vs. Candlestick Pattern
All the candles in a time frame form a candlestick chart. But, a candlestick pattern has only a few of them.
Sometimes, a candlestick pattern has only one candle. A hammer, a doji, or a shooting star are such examples.
They are a one-candle pattern that appears on Forex charts. Other patterns have two or more candles.
Here are the most relevant two-candle Japanese patterns:
- Piercing and dark-cloud cover. Powerful reversal patterns that appear at the end of a trend. The second candle moves aggressively in the 1st candle’s territory. Piercing is bullish, while the dark-cloud cover is bearish.
- Bullish and bearish engulfing. Still reversal patterns, the second candle totally engulfs the previous one.
Stars are three-candle patterns. They are bullish (morning stars) or bearish (evening stars).
We won’t cover all the Japanese candlestick techniques here. We did that already in a previous article.
What we’ll do is to highlight their importance. There’s a reason for that.
They’re mostly reversal patterns. As such, traders use them to find tops and bottoms.
But to use them, traders must learn them first. There’s no Japanese candlestick indicator mt4 platform offers.
The candle itself is an indicator. Because of the OHLC. The OHLC makes it an indicator.
The Japanese candlestick patterns vary from very simple to complicated ones. However, there’s an important rule of thumb: the bigger the time frame, the bigger the implications.
For example, consider a morning star on the monthly chart. It has far bigger consequences that one on the hourly time frame.
Pros and Cons of a Candlestick Chart
Best Forex charts have candlesticks. With that, we said everything.
While we didn’t cover yet the line chart, a candlestick chart is by far the best possible way to interpret a market. But, even more important, the patterns one can use are everything a trader needs.
For it is these patterns that make a candlestick chart better than a line chart. Or an OHLC bars chart.
That’s the biggest advantage of using candlesticks in Forex charts. Japanese candlestick charting shows reversal conditions.
Everyone wants to know when a trend ends. As such, they appeal to traders the most.
They allow picking a top or a bottom. What more to ask from a pattern? What more it is to technical analysis?
It’s difficult to see a disadvantage when using candlestick charts. Because of that, a candlestick chart is the most favored type of chart today.
Retail traders and not only embraced candlestick analysis. There are several reasons for that.
First, they allow for the understanding price. They put an order in the way the price of a security moves.
Second, they show human nature tendency in trading. To be able to spot reversals, one needs to understand crowd behavior.
If you know how to read candlestick charts, you know how to interpret crowd behavior. All these make a candlestick chart an important pillar of technical analysis.
Here’s the same EURUSD four-hour time frame shown earlier. Only this time, instead of OHLC bars, candles appear.
Spot the difference between the two? The price activity looks to be clearly defined on a candlestick chart.
An OHLC bars chart looks confusing. How about a line chart?
Trading with Line Charts
A line chart shows…a line. It is the most basic form of chart analysis that exists.
The line in a line chart connects different points. But can a simple line be part of the technical analysis?
Forex charts don’t have to be complicated. In fact, many people hate all the OHLC information.
They want to keep things simple. For them, a line chart works just fine.
Moreover, they want to see price action in the clearest possible way. However, a line chart has a catch.
We agreed earlier that the line connects points. But, what points?
A simple line chart connects the closing of a candle. Or, a bar.
That makes a line chart interesting! Why looking at a candlestick chart or OHLC bars chart, when a simple line shows the closing?
Or, the way price goes. When the line rises, the trend is bullish. When it falls, bears are in control.
Below is the same EURUSD four-hour time frame. After a candlestick chart and an OHLC bars chart, it is time for a line chart.
Between the three charts, the line chart is the emptiest. It is the purest form to show price activity.
Why do traders use a line chart? Well, exactly because it is so simple.
Pros and Cons of a Line Chart
A line chart shows trends over time.
Because of that, patterns are easier to spot. For example, head and shoulders patterns.
Take a look above. Only connecting the closing values of a period, the head and shoulders is more visible.
With a candlestick chart or and OHLC bars chart, the pattern wouldn’t be that visible. The shadows and the body of the candles/bars may end up being confusing.
As such, patterns recognition is easier with a line chart. That’s its biggest advantage.
After all, trading is about pattern recognition. Right?
Moreover, price action is easier to read.
On the cons side, many technical analysis concepts can’t be applied on this chart type. Forex charts that use only such a line have their limitations.
While it keeps things simple, it misses a lot of price action. Most of the times, that’s a disadvantage.
Consider the Elliott Waves Theory. Or any other trading theory as a matter of fact.
With a line chart, it can’t be used. For instance, one can’t calculate the extension needed in an impulsive wave.
The entire price movement should be interpreted. Not only the closing.
The same is valid with other technical analysis concepts and tools. Fibonacci ratios, harmonic patterns…they don’t work with a line chart.
In the end, it is up to the trader. There’s no way in telling which Forex charts work best. Or, what are the best Forex charts.
Step back for a minute and compare the three EURUSD Forex charts. Which one do you like most?
There’s no straight answer to this question. Some traders like a line chart because “they can see clearly again”.
Others like a candlestick chart because of the candlestick reversal patterns. That’s a good reason to use Forex charts.
Some other traders use OHLC bars to get away from candlesticks. They interpret only the opening and the closing prices.
Candlesticks, bars, or a simple line…they are only another way of visualization of the price.
The truth is that best Forex charts are the ones that end up with a profitable trade. The ones that give the future market direction.
It doesn’t matter what type of chart you used, as long as you knew beforehand where the price will go. That’s technical analysis.
And that’s why traders use Forex charts. To form an educated guess about the future price action to come.
But trading is not only technical. Fundamental analysis matters too.
However, the technical analysis starts from a chart. Therefore, understanding the basic types of charts, their advantages, and disadvantages, is a must for any Forex trader.