Forex Line Charts and Graphs
Line charts can be regarded as one of the least used type of charts all of forex trading. Although they are very simple to read and decipher, however they do not present sufficient data for any forex trader to make informed and intelligent trade decisions. Hence, not many forex traders use them due to the reasons already cited above.
How Forex Line Charts Work
We derive the line charts by generally using calculations based on the open or close value of a currency pair and then drawing a straight line to join these points. The end product is a relatively smooth chart that has only factored in the values at which the currency pair was priced at certain times.
What This Chart Don’t Show
The weakness of forex line charts is not due to the what the charts can show to you, but rather what they can’t. In this example, we will use a one hour line chart with each point on the chart equating to the opening price of the currency pair for that hour.
Here are a few fictional values for our example currency pair, GBPUSD, over a 3 hour period. For illustration purposes, a value will be posted for 5.30pm, to show the problems that a line chart will give.
Value at 4.00pm = $1.60
Value at 5.00pm = $1.5950
Value at 5.30pm = $1.56
Value at 6.00pm = $1.60
What You Don’t See In the Data
When we represent the data by drawing the chart by using the closed price at the end of each hour, we do not see much change in the price. From the above, we can only deduce a change of price of only 50 pips from 4.00pm to 5.00pm, which later recovered to its original price of $1.60 at 6.oopm. Because line charts only show the price for one point in time each hour, there is a lot of data with regards to the forex market missing. As you can see, the price actually fell more than 400 pips to $1.56 before rebounding, but according to our line graph it only fell as low as 50 pips to $1.5950.
Line Graphs give an incomplete picture
As you can see from the above example, an hourly time frame line chart will only be able to accurately represent the price of a currency pair once every one hour. It is only possible to know the price at one point during the whole trading time. This means that you would have insufficient information and opening new positions based on insufficient information will easily translate to losses. Hence the recommended type of charts are the bar charts or candlestick charts instead of the line charts.
Bar Charts and OHLC Charts
A typical bar in a Bar Chart looks like the image below. Bar charts provide more information than line charts as they also reflect the price changes that happen during the bar and not just at particular point in time.
Bar charts and good but still lose out to the candlestick charts. This is because for candlestick charts, not only do they show all relevant data, the graphical form ensures that the forex trader can read off it more quickly.
Reading a Bar Chart
In this type of charts, the bars are read from left to right. As seen above, the left line sticking out of the left side of the bar refers to the open price or the price at which the currency pair opened that bar. At the top area of the bar is the highest price that the currency pair attained during that time period. Likewise, the bottom point on the line is the lowest price that the currency pair had hit. The right line sticking out of the bar is the price the currency pair closed during that time period. This would mean that the price appreciated during the time period with the close price higher than the open price.
Candlestick charts can be regarded as the most popularly used type of charts of all forex charts. Candlestick charts offer all the data of bar charts in an easy to read and graphical dataset. Once you learn the basics of candlestick charts you will be able to process data faster and make quicker decisions before opening a position in forex trading.
Candlesticks have used for centuries and it was first created as a method to quickly see the changes in price of rice on Japanese commodity exchanges. The image below will give you a better idea of how individual candlesticks may look like in candlestick charts.
Candlestick charts show all the data of a bar chart, but do so in a graphical way and utilize a different terminology. The middle colored portion of the candlestick is called the “real body” or “solid body.” The real body indicates the total realized changed in price of the currency pair during trading in a specific time frame. The sticks or “wicks” below the candlestick are called shadows. Similar to a bar chart, the shadows indicate where the price dropped the lowest or rose to the highest.
Do note that there are whole trading systems that are designed around the use of candlestick patters to time the entries and exits. The trading systems that are recommended in this site such as Black Dog System , Forex Trading Made EZ and Leo Trader Pro do not use candlestick patterns as a basis for their systems. However, if you feel that you’d prefer find out more about candlesticks before using any one of the mentioned profitable systems, click here.