Line, bar, candle, three-line break, point and fi gure, kagi, and renko charts are reviewed.
Types of Charts and How They Are Constructed
We have all heard the phrase, “It’s all in the chart”.-For the forex trader the charts provide signs for entering and exiting a trade.
Several basic charts are used to represent price movements. They are the line chart, the-bar-chart, and the candlestick chart. More advanced charts are the point and fi gure chart, the 3-line or 3-point break chart, kagi, and renko charts. Each chart provides a different
visualization of what is going on with price movements. Remember that a chart refl ects the bid price. Some platforms allow the charts to also refl ect the ask or offer price
Line Chart – These charts show prices as lines. One of the best uses of this chart is when comparing one currency against another. Typically, lines connect closing prices for the period being plotted.
Bar Chart – These charts represent the price as a bar showing the open, high, low, and close for a specifi ed period.
Candlesticks – These originated in Asia and allow for easier visualization of the same information as bar charts. The key to candlesticks is the relationship of the open and close for a specifi c period.
Advanced Charting – Smoothing out the Noise in the Market
Although the line, bar, and candlestick charts track the price movement against time, traders want answers to questions such as: Who is in control, the buyers or sellers? Is the trend pattern stable? Several chart types provide tools to investigate market sentiment and trend direction.
Point and Figure – This chart concept ignores time and focuses on who is in control. If buyers are in control you will see a column of X’s. If sellers are in control, you will see a column of O’s. The X or O represents a certain fi xed amount of movement. If the amount
is 10 S, then the price has to move 10 s or more higher to have another X added to it. It takes a 3-box reversal to produce a new column of O’s indicating a reversal in price direction.
The advantage of point and fi gure is it enables a view of key support and resistance areas as well as breakout points. The chart below shows prices are in a sideways range, but the last column of O’s shows that the momentum is for the sellers. Looking at this chart, a forex trader would not be willing to be a buyer. Using point-andfigure charts help identify areas of support and resistance. We show some tactical use of this concept in a later chapter.
Note: Please see Abe’s book “Understanding Forex: Trading to Win” for the remainder of the chapter. Copies can be obtained from the Freebie section of forexhound.com