Let’s take a look at the three most popular types of charts:
- Line chart
- Bar chart
- Candlestick chart
Now, we’ll explain each of the charts, and let you know what you should know about each of them.
A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.
Here is an example of a line chart for EUR/USD:
A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.
The vertical bar itself indicates the currency pair’s trading range as a whole.
The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.
Here is an example of a bar chart for EUR/USD:
Take note, throughout our lessons, you will see the word “bar” in reference to a single piece of data on a chart.
A bar is simply one segment of time, whether it is one day, one week, or one hour. When you see the word ‘bar’ going forward, be sure to understand what time frame it is referencing.
Bar charts are also called “OHLC” charts, because they indicate the Open, the High, the Low, and the Close for that particular currency. Here’s an example of a price bar:
Open: The little horizontal line on the left is the opening price
High: The top of the vertical line defines the highest price of the time period
Low: The bottom of the vertical line defines the lowest price of the time period
Close: The little horizontal line on the right is the closing price
Candlestick chart show the same information as a bar chart, but in a prettier, graphic format.
Candlestick bars still indicate the high-to-low range with a vertical line.
However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. Traditionally, if the block in the middle is filled or colored in, then the currency closed lower than it opened.
In the following example, the ‘filled color’ is black. For our ‘filled’ blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be “white” or hollow or unfilled.
Here at BabyPips.com, we don’t like to use the traditional black and white candlesticks. They just look so unappealing. And since we spend so much time looking at charts, we feel it’s easier to look at a chart that’s colored.
A color television is much better than a black and white television, so why not splash some color in those candlestick charts?
We simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green.
If the price closed lower than it opened, the candlestick would be red.
In our later lessons, you will see how using green and red candles will allow you to “see” things on the charts much faster, such as uptrend/downtrends and possible reversal points.
For now, just remember that we use red and green candlesticks instead of black and white and we will be using these colors from now on.
Check out these candlesticks…BabyPips.com style! Awww yeeaaah! You know you like that!
Here is an example of a candlestick chart for EUR/USD. Isn’t it pretty?
The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:
- Candlesticks are easy to interpret, and are a good place for beginners to start figuring out chart analysis.
- Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help in studying, it might help with trading as well!
- Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
- Candlesticks are good at identifying marketing turning points – reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later.
Now that you know why candlesticks are so cool, it’s time to let you know that we will be using candlestick charts for most, if not all of chart examples on this site.