What are trading charts? Part 2February 20, 2021 2021-04-18 20:41
What are trading charts? Part 2
In this lesson, we take a look at the different trading chart types. We look at the most well-known chart types like line, candlestick and bar, as well as less known, yet still effective chart types like Heiken-Ashi, Renko, and the tick chart.
If you’re looking for more information about what trading charts are, how they work and why they’re important, you can see that in our previous lesson, ‘What are trading charts? Part1’.
Construction of a trading chart
Before we look at specific trading charts, you should understand the construction of a chart.
Primarily they’re constructed by price and time, however, you can drill down a little deeper. Given that we plot charts using price and time, you can break down each time period into four separate data elements.
- Open – Where the price opens during that period of time
- High – The highest price the market reaches over a specific time period
- Low – The lowest price the market reaches over a specific time period
- Close – The price a period of time closes at
How many types of trading chart are there?
Over time there have been lots of different chart types that have entered technical analysis. Below is a list so you can see how many there are.
- Bar chart
- Candlestick chart
- Line chart
- Heiken Ashi chart
- Renko chart
- Tick chart
- Point & Figure chart
- Market Profile chart
- Candlestick chart
- Candle Volume chart
- Area chart
- Volume chart
- Volume at Price chart (VAP)
- EquiVolume chart
- Range Bar chart
- Kagi chart
- Three Line Break chart
- High Low Close Bar chart
- Open High Low Close Bar chart
- Mountain chart
We’ll take a look at the most popular in a little more detail, they are; line chart, bar chart, candlestick chart, Heiken Ashi chart, Renko chart and tick chart.
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What are the most commonly used trading charts?
The most common trading charts you’ll see on respected websites and publications are the line and candlestick charts. Line charts are often used to report prices in places like newspapers and fundamental reports.
Technical analysts don’t tend to use line charts because both bar and candlesticks provide more information. They both use the construction mentioned above; open, high, low, and close.
The Heiken Ashi, Renko, and tick charts have all started being used more recently.
Bar charts are also known as the Open High Low Close chart (OHLC) because it’s constructed from those four points over any time period.
On a single bar, you will see each point.
- High – This is the highest part of a bar and will show the highest price the market went to
- Low – This is the lowest part of the bar and shows the lowest price the market went to
- Open – This is the left-hand horizontal bar sticking out of the vertical line. It shows one single price where the market opened during that period
- Close – This is the right-hand horizontal bar sticking out of the vertical line. It shows one single price where the market closed during that period
The colour can also signal which direction the market is going. Traditionally, if the close is above the open, then the bar is green and if the close is below the open, then it’s red. The colours so change between platforms and you can change them to whatever you prefer.
You can also look at bars next to each other. For example, if you see three green bars one after the other, it’s a clear signal that the market is aggressively moving up.
Where you find the open compared to the close can give you great insights into where the price might go next, especially when you take into account their position relative to the highs and lows.
Bar and candlestick charts are very similar because they’re made up of the same inputs (open, high, low, close). Some argue that candlesticks are better because they’re more visual but this comes down to your preference. It is true that candlesticks are more common, so it would suggest they’re more popular.
Candlestick charts are arguably the most popular type of chart. They were created by Honma Munehisa in the 18th century in Japan and have proven to be valuable to traders ever since.
Munehisa wrote lots of books about trading and the financial markets but he is best known for developing candlesticks.
The formation of a candlestick is very similar to a bar chart, it consists of the same open, high, low, and close but it presented slightly differently.
- Body: You’ll see a body, which represents the open and the close of a period. Traditionally they’re red when the open is higher than the close and green when the close is higher than the red.
- Wicks: The wicks are the vertical line at the bottom and top of the body. They represent the highest price and the lowest price that the market reached during that period.
The same as the bar chart, the relationship between the high, low and open and close can tell you a lot about the potential next move of the market. There are lots of candlestick formations that are widely used to predict the next candle. We’ll cover these in our lesson ‘What are candlestick patterns in trading’.
Line charts are very simple and simply take a single price for any period and plot a line between them. The price that’s taken might change depending on your preference and can be one of the following; open, high, low, and close.
Normally when you see line charts in newspapers or other articles, they will take the close price, but as mentioned you can use any of the four main inputs.
Line charts aren’t great to analyse the markets, they don’t offer as much information as the bar or candlestick charts. they’re better used to show a previous trend or move rather than using it to predict future moves.
Heiken Ashi chart
Heiken Ashi charts are a progression of the candlestick chart. They have the same appearance but there are key differences. When you translate Heiken Ashi from Japanese, it means ‘average bar’, which is suitably relevant.
The formula to construct Heiken Ashi charts is the new average prices for the open, high, low and close. The formula for each input is below.
Heiken Ashi open (HAO) = (open of previous bar + close of previous bar) / 2
Heiken Ashi close (HAC) = (open + high + low + close) / 4
Heiken Ashi high (HAH) = highest of high, open, or close
Heiken Ashi low (HAL) = lowest of low, open, or close
Why use Heiken Ashi charts?
They’re a lot easier to identify the trend. They have a smooth appearance which makes this seeing the trend quickly easier. Therefore they’re great to identify the trend but you would be advised to use further analysis to look for entries and targets.
They don’t show the actual current price, which can be misleading, therefore, we would recommend that you use them in conjunction with candlestick charts.
Renko charts were again developed in Japan and are similar to the Point and Figure chart, which is seen as a more western analysis tool.
There are no uniform time intervals like most chart types, it is based on price movements. When the price moves a specific amount, a new brick is created either above or below the previous one, at 45 degrees (not on the same line). It does have a time axis, but it’s not fixed like a bar or candlestick chart.
Renko charts smooth the price and gets rid of any unnecessary noise of the market. They’re often used to identify key support and resistance levels however you do lose the ability to analyse the price action, which is why they’re not the most popular chart that traders use.
Tick charts again don’t use a uniform time interval. A new bar is created after several transactions, the amount is up to you, the trader.
As it’s portrayed as a bar, it has similar inputs as a bar chart, however, it does not show the open.
The advantage of tick charts are that it shows when the markets are volatile. The more volatile, the more bars and movement you will see. Normally these are used for very short term trader, scalpers often use this type of chart to understand the volatility.
The number of transitions that you can choose from is often based on Fibonacci numbers as well.
In our next lesson, we take a look at time frames in ‘What are time frames?’ Understanding this concept will give you great insight into how to start to build your strategy.