When traders and investors look to make predictions on particular currency pair prices and exchange rates, they will most likely turn to technical analysis at least once. Because technical analysis majorly consists of charts and graphs, they will then need to choose an appropriate chart or graph to work with. The problem is, there are multiple types of charts and graphs available to them, so they must weigh up in their minds which chart or graph will be the most appropriate and effective.
The Forex candlestick chart tends to be the more popular chart type in Forex trading. This type of chart allows traders and investors to spot currency pair price and exchange rate trends, as well as allowing them to see the limits on the daily currency pair price and exchange rate variations. Candlestick charts are also effective producing a measure of confidence in Forex traders and investors. Over each day of trading, a candlestick chart will plot a new box-and-whiskers-type-figure. Each box will be shaded in a different way to represent each day. If the box is shaded black, this means that the currency pair price and exchange rate closed at a lower price than its opening price, that day – and vice versa, if the box is filled with white. If the box is shaded black, the top of the box will represent the opening price and the bottom of the box will represent the closing price – and again, vice versa if the box is filled with white. Sometimes different colors are used, though the colors of the boxes presented will always be either dark or light. The top of the whiskers represents the daily highs and the bottom of the whiskers represents the daily lows, respectively for the currency pair price and exchange rate.
The Forex bar chart does not present as much information as the candlestick chart does. Bar charts do provide us with the daily highs and lows of a particular currency pair price and exchange rate. However, when it comes to opening and closing prices, a bar chart will only be able to tell us the closing price without the opening price – the closing price is marked the whisker as a tick. Although the bar chart does bear a significant disadvantage, it does allow us to work with the same financial information through an easier and more appealing visual medium. Bar charts can also hold more data and in less space than candlestick charts.
The Forex line chart tends to be the most popular type of chart in Forex trading, simply because it is the easiest type of chart to work with. However, they do leave out a lot information, as day-by-day line charts only provide us with each day’s closing currency pair price and exchange rate. Candlestick charts and bar charts on the other hand, can provide us with each day’s highs and lows as well as each day’s closing rate. Candlestick charts can even provide us with each day’s opening rate too. Traders and investors can use candlestick charts and bar charts to assess a currency pair’s level of volatility and its direction, however line charts fail to present this opportunity due to the lack of information they bring.
In conclusion, there are three main types of Forex charts as listed in order of strength and usefulness: candlestick charts, bar charts and line charts. Candlestick charts are the strongest as they can provide us with each day’s opening rate for a particular currency pair price and exchange rate whereas the other two cannot. The line chart is the weakest as it provides us with the least information. However, each chart has its own unique advantage(s) and it really depends on your situation as to which chart would be the most appropriate to work with. You should also remember that the different charts can also differ on different websites and sources. Line charts can be made more complex and informative if the trader or investor has more data values to work with. Though, in general, line charts simply serve to graphically-illustrate currency pair prices and exchange rates as functions of time. Line charts, in relation to opening and closing prices, fail to organize the daily highs and lows of currency pair prices and exchange rates as well as candlestick charts can.