Which chart type should I use – Candlestick chart or OHLC chart (Bar Chart) or even the line chart? The reverberating question on any trader’s mind. You toggle between each type, yet you can’t make it out, at times. This article will take a deep dive on the three types of charts and enlighten you on all the hidden aspects.
The most widely used chart among the trading fraternity.
As a matter of fact, the candlestick chart is also an OHLC chart.
OHLC simply means- Open, High, Low, Close. Any chart which gives open, high, low and close of a period is an OHLC chart.
The candlestick chart does give the same with ease as well. So, it is technically an OHLC chart. Yet the trading fraternity considers the bar chart as OHLC chart. Astonishing!
On plain view, Candlestick chart looks more attractive and gives a clear idea about the market sentiment.
The Candlestick chart is built with the candlesticks. A candle shows its open, high, low and close price for that particular period.
If it is a 1-hour chart, it shows the OHLC of that particular hour. If it is a daily chart, then one candle represents the OHLC for that specific day.
Types of Candlestick
There are two types of Candlestick viz. Bull Candle and Bear Candle.
If the close price is higher than the open price, it is a bull candle. It is either painted in the green color or white color depending on the trader choice.
Likewise, a bear candle has its close price below than the open price. It is either red or black.
There are three essential portions of a candlestick which are of immense importance.
Body — the portion between open and close price.
Upper Shadow — the portion between high and close in a bull candle (or) the portion between high and open in a bear candle.
Lower Shadow — the portion between low and close in a bull candle (or) the portion between low and open in a bear candle.
‘Wick’ or ‘tail’ general refers to upper shadow and lower shadow.
Importance of wick in Candlestick charts
In a bull candle, the body represents the portion in which bulls were stronger from open to close. The wick represents the part in which bears managed to make a comeback. The vice-versa applies to a bear candle.
So if the body is long and the wick is small, it signifies the strength of bulls and enhances the chance of bullish move to continue.
On the other hand, if the body is small and the wick is large, it suggests bulls are retreating, and bears are gaining strength.
If there is a series of short body, high-wick candles, it is referred to as ‘Price Rejection’ by the traders. Suppose, if it coincides with a support or resistance level, it cautions the trader of a trend reversal.
It doesn’t matter whether the candle is green or red for a price rejection. It is the body and the direction of wick that matters.
There are many candlestick patterns available depending on the size of the body and wick of candlesticks. These patterns give a clear picture of the strength of bulls and bears at a glance for a trader.
It is the primary application of Candlestick charts. However, Candlestick charts, found by Japanese, is considered more of an eastern trading culture whereas Bar charts are the ones most prevalent in the west.
Bar Chart (or) OHLC Chart
The bar chart is constituted of bars. The bars have a single vertical line and two horizontal lines on either side of the vertical line.
The one to the left indicates the open price and the other to the right indicates the close price.
The top of the vertical line represents the High and the bottom represents the low. Thus, all the essentials of price information are depicted clearly in the bar chart (or) OHLC chart.
The traditional bar chart uses only a single color- black. However, now they do come in green and red like a candlestick chart. A trader can get every price information from a bar chart, just like a candlestick trader, if he looks closely. But there are specific key differences, that sets out a bar chart from the candlestick chart.
Bar Chart vs. Candlestick chart
East and West always have their differences, whether it be in lifestyle or technology. But trading fraternity is one that holds no sentiment. It accepts and adapts to the change far sooner than other fields. So, it is not the difference of culture that biases one to a particular chart. Instead, its the psychology and approach towards the market.
Equality vs. Inequality
What do you think as the most critical price information in a chart?
If you answer, Open and Close — you have to stick with the candlestick chart.
If you answer, all of the parameter — Open, High Low and Close- you have to use the Bar Chart.
Though the Bar chart accentuates, open and close values like the candlestick chart do, it does so with equal importance. Whereas, the candlestick chart discriminates it by representing it with body and shadows.
If a trader is of the opinion, the closing price is as equal as the high or low, then price rejection becomes irrelevant to a bar chart trader. Alternatively, a candlestick trader has an advantage in spotting a trend at its twilight, miles ahead.
Difference between Open and Close
For a bar chart trader, the close and open price of the adjacent candles makes the day (every day, to be precise).
It might seem irrelevant in shorter timeframes, but on the daily chart, it elucidates the sentiment for that day. Since it does show whether bulls (or bears) are enthusiastic as compared to the previous day.
The sentiment, interest and willingness pictured perfectly as well as instantly for a trader.
As the saying goes, ‘Every Pip matters in Forex trading’, every minute detail matters in chart analysis. The detail you are looking for is the answer to the chart you are looking for.
However, if you are not into details, here’s the deal for you — Line chart.
Line Chart consists of a simple line, connecting all the closing prices. For example, if you are looking at a daily chart, the closing price of each day is connected with a line.
It takes out the volatility and most information out of context, giving prime focus to the closing price.
The history behind the Line Chart
Line chart was prominently prevalent during the period when there was no electronic system. It was tedious to chart all the information accurately and instantly, manually.
Furthermore, the closing hour is the time, when top traders and business people put their orders with the broker, seeing the sentiment of the whole day.
Hence, traders felt the importance of closing price rather than other metrics to identify the sentiment, since big guns dominated the closing session.
As the technology advanced, technical analysis too advanced, processing every detail available in every possible way. However, the closing price is still the most critical factor, according to many renowned traders.
Therefore, analysts still use it to filter the noise out of the chart.
The Line chart is not inferior to the bar or candlestick chart in any way. In fact, most technical analysis principles formulated, including Elliott wave, were on the basis of the line chart.
A trader spends most of his time gazing at the charts. He trusts the interpretations made out of the charts and risks his money. Hence it is essential to select the right type of chart to have a clear picture of the market sentiment.
If you feel, open and close price are the prominent price action metric, go with the Candlestick chart.
Else, on the contrary, you deem all the Open, high, Low, Close (OHLC) metrics as a necessity, go for the bar chart.
Don’t want to complicate with too much detail; the line chart is for you.
These are the widely used charts by chart analysts. However, the trading fraternity was never shy of innovations. The new chart types like Renko, Heikin Ashi also interest the present generation traders.