Helping you pick the best chart type for your trading
Charts are one of the first things that a trader has to select when they enter their account. The default selection in Trading 212 PRO is the area chart, selected for its simplicity in providing the most important information needed to make a trade. The other options – candlesticks, Heikin-Ashi and bars – are available so that all trading styles can be supplied with the information they need for decision-making.
The area chart is a variation of the more widely used line chart, that has a highlighted area under the price line for better visual distinction, but in this article we will be using the latter formulation, as it better describes what is actually seen.
Line charts are used for their clearness – the close price is all that matters here, everything else is considered noise for those who either need a quick look to decide which way the price is going, or who are looking for an answer to the question “where did the market close”.
Suited for updates on developments when you are on the go, but may lack important bits of information like the high and low levels that a price has reached. Different trading styles rely on these highs and lows to predict future movements, be it as directional cues or previous support and resistance levels. Trends, ranges and retracements can still be seen, but the other chart types provide a more precise look, similar to zooming in with your camera phone and then looking through binoculars.
Bar charts (sometimes named OHLC charts) are effectively an upgraded version of line charts. Visually they are represented by vertical lines whose top and bottom are the high and low with two horizontal dashes that indicate the open (on the left) and close (on the right).
The OHLC abbreviation stands for Open, High, Low and Close prices, with the high and the low being the additions here. Traders who prefer this chart type are focused on the numbers and search for simple patterns in shorter timeframes. This is what bar charts give you. There is no explicit colouration here, unlike the next type of charts, and the emotional effect that some traders experience is limited.
Japanese candlesticks, who get their name from the land of samurais, because they were used to describe rice trading, became popular after Steve Nison introduced them to the Western world. Candlesticks have three visual elements that represent four values. The body is like.. a fat candlestick and is drawn between the open and close of the price in the respective timeframe.
Usually there are two thinner lines (although this isn’t always the case, one of the two can be missing) that come from the top and bottom of the candlestick and they represent the highest and lowest level that the price has reached for the period. These are called the upper and lower wick, but both can be referred to as “shadows”.
What makes this chart type popular is that it actually catches and relays, at least to some extent, the emotions behind price movements. Especially long wicks can reveal strong support and resistance levels (link to article) if they are observed on longer periods and can show violent movements within a single day (see the Dow Jones daily candlestick for yesterday).
This is a trend-focused chart type and aims to filter out the effects of excess volatility. It’s name is also Japanese, meaning “average bar,” and are calculated using a modified OHLC formula.
- xClose = (Open+High+Low+Close)/4
o Average price of the current bar
- xOpen = [xOpen(Previous Bar) + Close(Previous Bar)]/2
o Midpoint of the previous bar
- xHigh = Max(High, xOpen, xClose)
o Highest value in the set
- xLow = Min(Low, xOpen, xClose)
o Lowest value in the set
There are several scenarios where the chart provides signals. The main situation is when there are no lower wicks, showing a strong uptrend (and vice versa). Another preferable situation would be when there is a small candle with long shadows on both sides – interpreted as a signal of a trend reversal.
One aspect of using charts, especially by traders in this day and age, is what screen they are used on. Line charts are easiest to read when the screen is small and provide the quickest information when taking a quick peek at what’s going on. If everything is ok then it will suffice, but if something has changed and you have to make a decision and make or change a trade, then it would be best to switch to your preferred chart type (if it isn’t the line one).
There are actually even more variations of charts – hollow candlesticks, bars excluding the open price – but these are exotic and used by an extremely low percentage of traders. Most traders get used to one type, predominantly candlesticks, as it has the mix of what is considered essential and displayed in a straightforward way.
The truth is that no single indicator will cover all situations and circumstances that arise in markets. Each can be useful in different situations and either provide enough information and save time, or enough information for the best possible decision.
Our next article will be available tomorrow at 4:00pm GMT- “Jack Ma – the Man Behind Alibaba’s Rise and Rise”.