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The use of charts in trading has been around for years. Back in the day they would be drawn by hand, nowadays we have the technology and tools to generate these automatically. What has remained constant is their applicability and significance to trading.
From spotting patterns to identifying trends, the use of charts is one of the most important aspects of technical analysis. Traders use charts to study trends, overlay technical indicators, apply Fibonacci retracements, perform candlestick analysis, and much more.
As a number of different chart types exist, price charts are a good place to start if you’re a beginner trader.
Price charts show changes in supply and demand, usually demonstrated through support and resistance levels. When price reaches a support level (a technical floor), demand – willing buyers – can prevent price action from falling further. Meanwhile, at resistance (a technical ceiling), supply can prevent price from moving higher.
Technically, price charts are visual representations of historical data and real-time price changes, helping traders understand how prices from different asset classes, such as currencies, stocks, and bonds, move and their patterns and tendencies.
Chart analysis – or ‘technical analysis’ – carried out on price charts helps inform traders how a particular security is expected to move in the future. Technical analysis analyses historical price and volume data to forecast future price movements. This allows traders to decide whether to buy, sell, or hold based on their interpretation of the chart data.
The three most common types of price charts are line charts, bar charts, and candlestick charts. As their name suggests, price movement is represented by lines, bars, and candles, respectively. Lines are simple continuous marks, bars contain a vertical line with small horizontal lines to the right and left, and candles consist of a larger real body and wicks (upper and lower shadows) at the top and bottom, which we will go over in more detail below.
When you look at a time-series chart, the x-axis represents the timeframe (left to right), and the y-axis represents the price scale. Each bar/candle signifies one time unit – which could be anything depending on what a trader sets it to. If set to one day, each bar/candle indicates the price data over 24 hours. If set to the one-hour timeframe, each bar/candle will indicate one hour of price activity. This is particularly helpful for traders as it depicts the volatility of a market, such as a currency pair or a stock, at each point in time over a given period.
In this article, we’ll be using the price charts of the GBP/USD (British pound versus the US dollar) currency pair over a time period of 3 hours as an example.
Line charts are one of the most basic chart forms, depicting a continuous line drawn from one closing price to another over a given period. Consequently, a line chart essentially filters out highs, lows, and opening prices, enabling traders to more easily identify a market’s trend.
As shown in Figure 1 below, the GBP/USD currency pair has been gradually trending higher since late 2023.
Figure 1 - Chart Created by TradingView
Another common use for line charts is to monitor trends and performance across multiple markets. Figure 2 below shows the performance of GBP versus G10 currencies on a particular day.
Figure 2 - Chart Created by TradingView
Some traders also use line charts to locate support and resistance levels, as illustrated in Figure 3.
Figure 3 - Chart Created by TradingView
Bar charts are vertical representations of price ranges. They go into more detail than line charts, showing highs and lows, along with a market's opening and closing prices. This is why they're also known as the 'OHLC' charts: Open, High, Low, Close.
Let's take two bars and decode them (Figure 4). These vertical bars, from low to high, demonstrate a market’s trading range (how high or low that market traded over a given period of time). The bars change in size depending on price fluctuations. When volatility increases, the bars increase in size, while a decrease in volatility will reduce the size of a bar’s range.
The high indicates the 'highest' price of the time period, whereas the low indicates the ‘lowest’ traded price. The opening value – the price at which the bar begins its life – is always situated on the left side of a bar, while the closing price – the price the bar closed over the specified time period – can be found on the right. For a bullish (positive) bar, the close will always be above the open; for a bearish (negative) bar, the close will be positioned south of the open. The process repeats itself, generating a new bar for a new period.
Figure 4
Figure 5 below shows the daily timeframe of the GBP/USD bar chart. Unlike a line chart, a bar chart permits a trader to conduct more thorough research, including analysis of volatility, chart patterns – think double-top and double-bottom reversal patterns – and bar-by-bar analysis, such as bullish and bearish pin bars, as well trend studies.
Figure 5 - Chart Created by TradingView
Candlestick charts, also known as Japanese Candlestick charts, tend to be the most preferred by traders as it is easier to spot patterns and trends given their visual representation.
Unlike bar charts and their vertical and horizontal lines, bullish and bearish candles are represented by coloured rectangular bodies, known as 'real bodies'. The real body connects the opening and closing prices.
Similar to bars, candlesticks have the same price components (Figure 6), with one exception: a candlestick’s real body demonstrates the price range between the opening and closing values of a candle for a specified time period. The example below shows a bullish candle coloured green and a bearish candle in red. This is a common arrangement, though with most reputable charting platforms, colours can be altered to suit personal preferences.
Figure 6
Below is an example of a candlestick chart using the GBP/USD daily chart (Figure 7).
Figure 7 - Chart Created by TradingView
A short upper wick on a green body indicates the security closed near its high. This generally means that buying was strong during that period and further buying could materialise. However, minor candles that close at highs with limited volatility may indicate less buying pressure.
Conversely, a short lower wick on a red candle suggests the security closed near its low. So, this can mean that selling pressure was strong during the candle’s time period and, as a result, further selling could be seen. Nevertheless, as noted for bullish candles, periods of low volatility may mean less selling pressure.
Most new traders tend to prefer candlesticks given their ease of use and visual appeal. Charts are the foundation upon which traders build their strategies. Technical traders rely on charts to analyse historical price movements, identify patterns, and predict future market behaviour. Charts are combined with technical indicators such as Bollinger Bands and Moving Averages to analyse volatility and trends, as well as determine entry and exit points. Traders, particularly price action traders, also complement their analysis with drawing tools to help show support and resistance levels, in addition to trend structure.
If you are interested in learning more about chart types, trading indicators, and price action, the FP Markets Academy provides extensive educational resources, from trading courses to live webinars, events, podcasts, and more.
1. What are price charts?
Price charts show changes in supply and demand, usually demonstrated through support and resistance levels. They visually represent historical data, real-time price changes, and how different asset classes move and their patterns and tendencies.
2. What is the use of price charts in trading?
Price charts are used to carry out chart analysis (technical analysis) that helps traders analyse historical prices and volume to forecast future price movements. This allows traders to decide whether to buy, sell, or hold based on their interpretation of the chart data. Traders use price charts in tandem with technical indicators and drawing tools.
3. Where can I learn more about chart types?
With FP Markets, you have access to the FP Markets Academy where you can learn about all chart types through videos and comprehensive articles.
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