Forex Charts - How to Use Different Types of Charts in Forex Trading
As you know we have two kinds of forex trading. Some traders use the price charts to trade and some other traders use the economical and political situation of the world and different countries. The first group use the technical analysis techniques and the second groups are called fundamental traders.Almost over 99% of the forex traders are belonged to the technical analyzing group. The reason is that you trade according to what you see, not what you hear or read that can be false or true. So it is easier to trade using the price charts and technical analysis.
I believe we have to combine both. Professional traders have to use chart analysis techniques and also consider the fundamentals. Those who are dependent only on one of the technical or fundamental analysis will suffer from heavy losses.
Technical analysis is very important and the price charts are the basic and the most important part of the technical analysis. So we have to learn about the different kinds of the price charts and the way we can use them.
There are several kinds of price charts in forex and also stock trading. Some of them are really useless and I think almost nobody use them to trade. So here I spend some time to explain about the popular and useful charts:
1. Line chart
2. Candlestick chart
3. Bar chart
4. Heikin-Ashi chart
5. Renko chart
Before I explain about the price charts, I have to explain about the time frames. If you are really new to forex or stock trading, you may not know what the time frames are.
Each price chart has to be plotted according to a special time frame. Trading platforms (the software that plot the price chart) support some special and standard time frames: One minute, 3 minutes, 5 minutes, 10, minutes, 15 minutes, 30 minutes, one hour, two hours, four hours, daily, weekly, monthly and yearly.
But in many platforms you are also able to define your custom time frame. For example you can also work with two minutes time frame.
But what is a time frame? Time frame is a special period of time. The platform considers and records the changes of the price in that period of time. Each time frame will have an open price, high price, low price and close price. For example when you draw the price in the 5 minute time frame, the platform records the price changes in each 5 minutes period. So each five minutes will have an open price. Open price (O) is the price that we have exactly when a five minutes period is started. Close price (C) is the price that we have exactly when a five minutes period is ended. High price (H) is the maximum price during the 5 minutes period and so low price (L) is the minimum price during the 5 minutes period.
Don’t worry if it looks a little hard to understand. I will give you more examples and explanations and you will understand it.
The only chart that doesn’t use any time frame is the tick chart. Tick chart is a line chart the records each and every price changes. As tick chart has no use in trading, so I have not included it in the list of the price chart and I will not explain about it more.
1. Line Chart:
In the line chart, the price changes are shown using a line. Even the line charts have to be plotted according to a special time frame but we are able to determine if we like the chart to be plotted according to the open price, close price, high price or low price. Close price is more reliable and popular because most traders don’t care about the price fluctuation during a time time frame and only the close price is important for them. So the line charts are plotted according to close price by default unless you change this default setting.
In addition to Open, Close, High and Low price you can have some other settings. For example the average of all of these 4 amounts: (O+H+L+C) / 4
Or some other settings like:
(H+L+C) / 3
(H+L+2*C) / 4
(H+L) / 2
Close price is the most popular and if you like your chart to cover more changes I recommend you to use the (O+H+L+C) / 4 setting. This setting eliminates more noises from your chart and it becomes easier to work.
The below chart is a line chart which is plotted using the one hour time frame. The blue vertical lines are plotted by me. This chart is set to close price. The vertical axis shows the price and the horizontal axis shows the time. In this case, as the time frame is set to one hour, each number in the horizontal axis shows a special hour.
To plot the one hour line chart, the platform just connects the close price of each hour. For example the close price of 8:00 is 1.5722 and the close price of 9:00 is 1.5730 and … (please see the below chart).
This is how a line chart can be plotted. Now lets see the other settings of the line chart.
The below chart is the same chart that covers the same period of time (from 7:00 to 21:00) but it is set to open price. As you see it looks just a little different.
This one is set to high price:
And this one is set to low price:
And here is the chart which is plotted according to the (O+H+L+C) / 4 setting:
As you see the last chart is very smoothed and has much lower noises than the others. You can compare them in the smaller size easier. The first chart is set to close price, the second to open price, the third to high price, the forth to low price and the last to (O+H+L+C) / 4. Obviously the last one looks clearer and has less or no noise.
This is the Euro/USD one hour line chart that covers the April 2008:
What is the advantage of the line chart and is it really recommended to work with it?
In other kinds of charts like candlestick charts, it is a little hard for the beginners to see and find the patterns that are used in technical analysis like double tops, double bottoms, head and shoulders and … . In this case the line chart looks a little easier to use but in general I do not recommend to use line chart because it is very poor. You can use it to find patterns, pennants, trends and then breakouts but your predictions will be much stronger when you get stronger signals through candlesticks.
2. Candlestick Chart:
Candlestick charts are the most popular charts in forex and also stock trading. Most traders love candlestick charts. Candlesticks are the most accurate and real time indicators. I have already written a detailed article about candlestick charts. Click here to have access to it and please read it carefully.
3. Bar Chart:
Bar charts are the American version of the candlesticks. Candlesticks are invented by a Japanese businessman. They say that Americans also invented the bars while they knew nothing about the Japanese candlesticks. I don’t know if it is really possible that the same thing to be invented by different people, at the same time while they know nothing about each other. There is no doubt that the bar charts were invented/used by Americans several years after the invention of the candlestick charts by the Japanese businessman.
Everything is the same in the bar and candlestick but just the shape. They both show the open, close, high and low price.
4. Heikin-Ashi Chart:
Heikin-Ashi is also invented by the Japanese and is becoming so popular among the forex and stock traders. I have already written a detailed article about the Heikin-Ashi charts and the way you can use them in your trades. Click here to read the article.
5. Renko Chart:
Renko is also invented by the Japanese but it is a really different chart. In the Renko charts, time and volume are not considered and they are plotted according to the price changes only. As Renko charts are becoming popular also, I have written an article about them. Click here to read the article.
So what kind of chart should you use in your trades?
Now that you know about the different kinds of charts, you can easily answer the above question. Candlestick charts are highly preferred because they give sharper, clearer, more real time and critical signals. I do not recommend any other chart. Even Heikin-Ashi which is a good chart should also be used along with the candlestick chart because it is delayed and if you trade using the Heikin-Ashi chart only, you will be too late in many trades.
Renko charts are also good but for swing trading only. You will need to have a lot of patience and also capital in your account because in many cases the price will go against you sometimes for several days if you trade using the Renko chart. I have never tried the Renko chart in my real trades but I have had an eye on them to become familiar with their behavior. It is good for swing trading but the question is if you like to be a swing trader, why you should not use the candlestick charts? Candlestick charts are also good for swing trading.
So I strongly recommend candlestick charts.
Further Reading:
Read and learn more about forex
trading and technical analysis