To analyse the movement of a currency pair’s price, you need a method to examine its historical and current price behaviour. A chart, particularly a price chart, is the primary tool that every trader utilising technical analysis must understand. A chart is a graphical depiction of a currency pair’s price over a specified time frame.
What is a Bar Graph in Forex?
A bar chart consists of multiple price bars, with each bar illustrating the price fluctuations over a specified period. The structure of a price bar is straightforward yet rich in information: a vertical line shows the highest and lowest traded prices during the period, while small horizontal ticks on the left and right indicate the opening and closing prices, respectively. This is what OHLC stands for—Open, High, Low, and Close.
To better comprehend bar charts, it’s crucial to understand timeframes. A timeframe is a unit of time over which market exchange rates are measured. For example, if you are viewing a 1-hour timeframe, each bar on the chart represents the price movements within that hour, showing the opening, closing, highest, and lowest price levels for that hour.
On the price chart, each OHLC bar is depicted with a positive or negative indication. Although these are not strictly bar patterns (we will cover those soon), they are categorized as follows:
– If the closing price is above the opening price, it signifies a bullish or upward trend sentiment.
– If the closing price is below the opening price, it is typically coloured red, indicating a bearish or downward trend sentiment due to the price decrease during that period.
To aid visualization, your charting platform will represent each candlestick with a colour based on its sentiment. Bullish candlesticks are often green or white, while bearish candlesticks are usually red or black.
How to Read Bar Charts in Forex?
Let’s break down the forex bar chart, commonly known as an OHLC chart. This chart is straightforward, reflecting the opening (O), high (H), low (L), and closing (C) prices of a currency pair. Its simplicity makes bar charts a fundamental tool in technical analysis.
Keep reading to delve deeper into the details of OHLC price bars and forex charts.
Opening Price:
The opening price is the first price traded during the bar and is indicated by a horizontal line on the left side of the bar. Typically, the opening price is the same as or close to the previous closing price.
High:
The high represents the highest price traded during the bar, marked by the top of the vertical bar. It indicates the upper extreme of the period.
Low:
The low is the lowest price traded during the bar, indicated by the bottom of the vertical bar. It represents the periodic bottom of the market.
Closing Price:
The closing price is the last price traded during the bar and is shown by a horizontal line on the right side of the bar.
Many forex traders consider the closing price the most crucial data point on the bar because it summarizes the final sentiment of the given period. On a daily chart, the closing price is referred to as the session’s settlement.
By understanding each line and tick on the bar chart, visualizing the complete picture becomes much easier. Regardless of what you’re trading in the financial markets, an OHLC bar chart appears as illustrated below.
It’s refreshingly straightforward, isn’t it? You might have thought it would be more complicated, but it isn’t. The real challenge lies in finding the best tradable currency pairs to trade at any given time.
The Time Period Of Bar Chart
In our previous example, you saw how an OHLC chart uses vertical lines to display a currency’s trading range over your chosen timeframe, with accompanying horizontal lines denoting the open and close prices.
Bar charts are highly versatile, accommodating various timeframes to suit different trading styles, from 5-minute and 15-minute intervals to 1-hour and 4-hour intervals, and extending up to daily charts.
The choice of timeframe depends entirely on your trading strategy and objectives. For instance, a 1-minute bar chart, which shows a new price bar every minute, would be beneficial for a day trader but less so for a long-term investor.
Conversely, a weekly bar chart, displaying a new bar for each week of price movement, is more suitable for a long-term investor than a day trader. Ultimately, your selected period should align with your trading strategy.
Bar charts do more than just highlight highs and lows; they also indicate price direction and the extent of movement within the bar, providing insights into market sentiment. Traders can evaluate the market’s trading activity based on the bar chart. When a trader makes decisions based on these price bars, they are known as price action traders.
Nicolellis range bars were developed in the mid-1990s by Vicente Nicolellis, a Brazilian trader and broker with over a decade of experience running a trading desk in Sao Paulo. Nicolellis created the concept of range bars, which consider only price, thus eliminating time from the equation.
What are Bar Charts used for?
In addition to the placement of the components, the size of the bar matters too. This is one of the aspects that make OHLC bars powerful technical indicators: they have built-in range finders!
The size of the bars changes according to the economic pressures affecting the supply and demand for a currency pair. Here’s how it works for a given time period:
– A tiny bar (small distance between high and low) indicates a lack of interest from both buyers and sellers. Small bars suggest consolidating markets, similar to the Dojis found in candlestick charts.
– A tall bar, with a wide distance between the high and the low, signifies a lot of buying and selling interest. Large bars signal volatility.
– The distance between the high and low is called the trading range. An unusual bar that differs in size or component configuration from the preceding bar should catch your attention.
When interpreted correctly, this simple symbol can show turning points, trend lines, and support and resistance levels. It provides a swift, comprehensive expression of price movement, with all relevant information included.
While bar charts are not absolute in their ability to predict currency movements, they offer a valuable tool to better understand market dynamics.
Conclusion
Bar charts illustrate price movements within a selected period, using vertical lines and horizontal ticks to denote highs, lows, opens and closes. Colour coding in bar charts—typically black or green for bullish movements and red for bearish—offers visual cues for price direction.
The versatility of bar chart time frames accommodates various trading strategies, from day trading to long-term investing. The size of an OHLC bar indicates market interest and volatility: larger bars signify active buying and selling, while smaller bars suggest market consolidation.