Chart Types Used In Technical Analysis
After opening an account with a broker, traders need to be aware of the different chart types out there. These are essential for traders in terms of decision-making as the information they supply is much valuable. In the following article, we will cover the most popular chart types used not only in Foreign Exchange but in most financial markets. We will also reference other ways in which technical analysis can be more effective. But first, how exactly are Charts illustrated in trading?
Charts are usually represented either linearly or logarithmically, being the X axis time and the Y axis price. Most commonly used Charts are time-based, but there are also popular Charts that do not rely on this factor, as we will see on ahead. As such, in this type of Charts, price movement is represented depending on what Time Frame you are analyzing. These can be set to be daily, weekly or even monthly or charted on Intraday Time Frames as small as 4 hours, 1 hours, 30 minutes, 5 minutes or even every 1 minute.
The main advantage of having several Time Frames is that you can conduct Multiple Time Frame Analysis. This, as we discussed in previous articles, is a great aid when trying to spot better trading Scenarios. Furthermore, being time-based, this enables traders to view prices live, base their actions on past data and time their orders in a simple and effective way.
Another indicator, often overlooked but commonly used with time-based Charts in technical analysis are Volumes. These give us the number of times a contract or share was traded in the market and are a measurement of market strength. This means that the relevance of the price action often depends on volume in that time.
The Line Chart, one of the simplest charts, only illustrates the closing price of the security in the specific Time Frame. The line is drawn, per example, by connecting the closing price of the GBP/USD at 11 p.m. to its next closing price at 12 p.m.
It is a clear and simple way of getting a general idea of the price movement’s direction in the market, which is preferred by some traders.
Nonetheless, it lacks information that is also important like the highest and lowest prices that the security reached in that Time Frame. This fact may be a deal breaker for traders whose strategies rely on these indicators, such as those who trade supports or resistances. Trading trends or retracements can also be applicable in a line chart. However, other charts simply provide a more in depth analysis than line charts which is in most cases is preferable for technical Analysis
Bar Charts, also referred to sometimes a type of OHLC Charts, add on the previous chart by being able to show Opening, High, Low and Closing prices, as the acronym sujests. They are composed of a series of vertical lines that represent the price range during that Time Frame. In addition, each vertical bar has two horizontal bars: One on the left indicating at what price the security opened and another on the right indicating at what price it closed.
Contrary to the line charts this will enable the trader to paint a better picture of the market with ease. Patterns and different signs that these bars can give allow the trader for a much more thorough analysis.
Similar to the bar chart, the Candlestick Chart gives traders the same information but are represented in a different way.
The wider part of the candlestick is shown between the opening and closing price. It is typically colored in black/red when the security closes on a lower price and white/green the other way around.
The thinner parts of the candlestick are commonly referred to as the upper/lower wicks or as shadows. These show us the highest and/or lowest prices during that timeframe, compared to the closing and opening price.
The main distinction between both charts has to do with the opening and closing prices. The bar chart focuses more on the relationship of the closing price from one Time Frame to another. On the other hand, with a quick look to a candlestick chart, market sentiment becomes much clearer. This due to the coloring of the real body of the candlestick which emphasizes the relationship between the closing and opening price within the same time frame. This illustration is one of the reasons why this type of chart is so popular.
Unlike the other Charts, the Renko Chart focuses only on price movement, completely disregarding time and the usage of volumes.
This Chart is composed of white and black bricks. These are placed depending on weather the price rose or not compared with the previous brick. If it did by enough pips, established by the brick size, a new one is placed. White bricks are used when the price of the security goes up and black bricks when they go down.
It is important to point out the fact that a new brick is only placed under certain volatility criteria. Either resulting in a major advantage or disadvantage for traders. It can be placed in a matter of minutes or take more than a day depending on market conditions. On one hand, this may be advantageous. Especially for traders who want a simple way of identifying supports and resistances, the overall trend and filter noise. On the other hand, this can make market sentiment hard to determine. Consequently rendering the usage of other analysis tools useless.
To Sum Up
Each Chart has its own utility. However, their usage depends on the type of trader you are and strategies that you prefer to put in practice. So, having a general knowledge of the options you have when it comes to analyzing securitie’s behaviour is an advantage.
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