The prices of shares, indices, foreign exchange and other tradable instruments are all based on the principle of supply and demand and at which price the greatest possible turnover is achieved. For a long time, traders had to manually draw these price changes on paper to view a price trend and make their trading decisions based on it. Fortunately, this is no longer necessary. Computers and programs like Metatrader 4 do the work. Here is an overview of the most popular chart types.
Candlestick charts are among the most popular price charts. They are used by traders due to the variety of trade information and a simple design. The candle chart has its name because of its appearance which resembles a candle.
On the chart the candle contains an opening, high, low and closing price for the corresponding time frame. The trader sets the time frame for each candle. For example, to see the high, low, open and close prices over a five-minute period, a trader chooses the 5 minute time frame for the candle chart. Every five minutes, a new candle is created in the chart accordingly. Candles show whether it is a bullish or bearish movement due to the color of the candle body. You can read and interpret candle charts as follows, based on price activity:
The opening price represents the first price traded during the candle and is indicated by either the top or bottom of the body. When a price rises, it graphically results in a mostly green or white candle. If the price falls, the candle usually turns red or black – depending on the settings in the trading platform. High price: The high is the highest price traded during the candle, indicated by the upper edge of the candle body or the wick. If the price closes on a high in the corresponding time unit, then no wick is displayed on the upper side. Lowest price: The low is the lowest price traded during the candle, indicated by the lower edge of the candle body or the wick. If the price closes on a low in the corresponding time unit, there will be no wick on the bottom.
The closing price is the last price traded in the candle indicated by either the top or bottom of the body. For example, the upward candles are green and the downward candlesticks are red. The colour indicates whether the closing price or the last price, if the candle is not yet finished, is above or below the opening price. Before a candle is finished, it changes constantly during a price movement. The opening price remains the same, but new highs or lows may occur until the candle is finished.
The bar chart is very similar to the candle chart (candlestick). It contains the same price information as the candle chart. Only the body is not a surface, but a simple line.The upper part of each bar represents the highest price of the day, while the lower part represents the lowest price. The closing price is indicated by a short horizontal line to the right of the bar, while the opening price is indicated by a line to the left of the bar.
Point & Figure
Point & Figure Charts are a very special type of optical price display that consists of columns of X’s and O’s that represent filtered price movements. X columns represent rising prices and O columns represent falling prices.
Each price box represents a specific value that the price must reach to justify an X or an O. Time is not a factor in P&F charting. These charts evolve with price development. No price development means no change in the P&F chart. In the classic 3-box reversal charts, the column reversals are further filtered so that a minimum of 3-boxes is required to reverse the current column. The 3-way reversal method is the most popular P&F chart method. P&F charts provide a unique view of price performance that has several advantages.
– Filter insignificant price movements and noises
– Concentration on important price movements
– Remove the time aspect from the analysis process.
– Significantly facilitates the identification of support/resistance levels
– Provision of automatic and subjective trend lines
Creating a P&F Diagram
A P&F chart shows price movements with rising X-pillars and falling O-pillars. Each column represents an upward trend or a kind of downward trend. Each X or O occupies a box on the chart. Each chart has a setting called Box Size, which defines the price range for each box.
Each chart has a second setting, called the inverse value, which determines the value a price needs to move in the opposite direction to justify a column reversal. If this reversal value is exceeded, a new column is started next to the previous one.
The “reverse distance” is the box size multiplied by the reverse value. A box size of 1 and the reversal amount of 3 would require a 3-point movement to justify a reversal (1 x 3). An X-pillar is extended as long as the price does not deviate more than the “reversal distance”.
The Renko charts developed in Japan also ignore time and focus exclusively on price changes that meet a minimum requirement. In this respect, these charts are very similar to the Point & Figure charts. Instead of X and O columns, Renko charts use price blocks that represent a fixed price movement. These stones are sometimes referred to as “blocks” or “boxes”. They move up or down in 45 degree lines with one stone per vertical column.
Structure and properties
Renko charts are based on blocks with a fixed value that filters out smaller price movements. A normal bar, line or candlestick chart has a uniform date axis with evenly spaced days, weeks and months. Renko charts ignore the time aspect and focus only on price changes. If the block value is set to 10 points for example, a price movement of 10 points or more is required to draw another block. Price fluctuations of less than 10 points are ignored and the Renko chart remains unchanged.. Conclusions
Like their Japanese relatives (Kagi and Three Line Break), Renko Charts filter noise by focusing exclusively on minimal price changes. Renko stones are not added unless the price changes by a certain amount. As with P&F charts, it is easy to identify important ups and downs and identify important support and resistance levels. Equipped with this information, traders can easily identify uptrends with higher highs and higher lows or downtrends with lower lows and lower highs. As with all charting techniques, traders should use other technical analysis tools to confirm or disprove their results on Renko charts.
The Heikin-Ashi candles calculate price data that filters out the market noise. Heikin-Ashi charts, developed by Munehisa Homma in the 17th century, share many features with the standard candles, but differ in the values used to create each candle. Instead of using the Open-High-High-Low-Low-Close (OHLC) bars as with the standard candles, the Heikin-Ashi technique uses a modified formula:
Close = (Open + High + Low + Close) / 4 – is the average price of the current bar
Open = (Open of Previous Bar + Close of Previous Bar) / 2 – Is the center of the previous bar.
High = Max von (High, Open, Close) – Highest value of the three candles
Low = Min of (Low, Open, Closed) – Lowest value of the three candles
Structure of the chart
The Heikin-Ashi Chart is structured like a normal candlestick chart, only that the formula for calculating each bar is different, as shown above. The descending periods are represented e.g. by red filled candles, ascending periods by blue candles.
From the graph above you can see some differences between a normal and a Heikin-Ashi chart. Heikin Ashi has a smoother appearance because it essentially takes an average of movement. With Heikin Ashi, there is a tendency for the candles to stay red on a downtrend and blue on an uptrend, while normal candles change color even if the price is moving mostly in one direction.
The current price displayed in a normal candle chart is also the current price of the value and corresponds to the closing price of the candle (or the current price if the bar is not closed). Since Heikin-Ashi takes an average, the current price on the candle may not match the price at which the market is actually trading. For this reason, many chart platforms show two prices on the y-axis: one for calculating the Heiken Ashi and one for the current price of the product. Heikin Ashi charts can also be used to keep positions open while a trend continues.
Risk Warning: Trading Foreign Exchange and Contracts for Difference (CFDs) is highly speculative and may not be suitable for all investors. The leverage created by trading on margin can work against you as well as for you. Only invest with money you can afford to lose and ensure that you fully understand the risks involved. You should also precisely inform yourself about all the risks associated with trading currencies and in case of doubt, consult an independent financial consultant.