Before we get started, let’s clear one thing up: a bar chart is nothing like a chart at a bar. In fact, it has nothing to do with drinking establishments at all. So, take off your leisure suit and belly up to the forex trading price bar.
Within the realm of technical analysis, bar charts are the workhorse. Along with Japanese candlestick charts, OHLC bar charts (open high low close) are a favorite among forex players around the world. Seriously, there would be far fewer technical traders and analysts without the bar chart.
Let’s take a look at the OHLC price bar and how it can be applied to the forex markets.
A bar chart is a collection of price bars, with each bar showing the price movements for a given period of time. Each price bar consists of a vertical line that shows the highest price reached during the period and the lowest price reached during the period.
Additionally, the OHLC price bar takes note of each periodic open and close. The opening price is marked by a small horizontal line on the left of the vertical line, and the closing price is marked by a small horizontal line on the right of the vertical line.
On the price chart, each OHLC bar is represented with a positive or negative connotation. Although not technically bar patterns (more on that in a minute), they are differentiated as follows:
Color coding the price bars depending on whether the price moved up or down helps forex traders to see price movements and trends more clearly.
After all, one of the foundational tenets of technical analysis is to provide value to the user. The color-coded price bars promote speed and efficiency – two elements vital to strong decision-making.
As we mentioned earlier, bar charts are often called OHLC (or HLC) bar charts because they indicate the open (O), high (H), low (L), and close (C) for that particular currency pair. Relative to other facets of technical analysis, it doesn’t get much easier than that.
Read on to learn more about the ins and outs of OHLC price bars and forex charts.
The open is the first price traded during the bar and is indicated by the horizontal foot on the left side of the bar. Usually, the open is the same or close to the previous close.
The high is the highest price traded during the bar and is indicated by the top of the vertical bar. Think of it as the period’s upper extreme.
The low is the lowest price traded during the bar and is indicated by the bottom of the vertical bar. The low is the periodic bottom of the market.
The closing price is the last price traded during the bar and is indicated by the horizontal foot on the right side of the bar.
Legions of forex traders view closing prices as being the most important data point on the bar because it summarizes the final sentiment of the given period. On the daily chart, the closing price is referred to as the session’s settlement.
Okay, so now that you know what all the lines mean, let’s take a look at what an actual bar CHART looks like. No matter what you may be trading in the financial markets, an OHLC bar chart appears as illustrated below.
Pretty straightforward, right? Bet you thought it would be more difficult than that. It isn’t; finding the best currency pairs to trade at a given time is a bit more of a challenge!
As you can see in the example above, an OHLC chart is composed of a vertical line that shows a currency’s trading range for the period you may be analyzing. It also consists of horizontal lines that indicate the period’s open and close on the chart.
Functionally, you can have 5-minute bars, 15-minute bars, 1-hour bars, 4-hour bars, etc. In forex, the most commonly used bars are the 15-minute, 1, and 4-hour, and daily.
It is completely up to you and your trading strategy to decide on which time period you want to analyze price action. A 1-minute bar chart, which shows a new price bar each minute, would be useful for a day trader but not an investor. A weekly bar chart, which shows a new bar for each week of price movement, may be appropriate for a long-term investor, but not so much for a day trader. Ultimately, your specified period should complement your trading strategy.
Bar charts also show the direction of movement—upward or downward—in the price, as well as how far the price moved during the bar. Participants can then assess the market’s trading activity based on the bar chart. When a trader makes trading decisions based on those price bars, they are called price action traders.
Fun Fact: Nicolellis range bars were developed in the mid-1990s by Vicente Nicolellis, a Brazilian trader and broker who spent over a decade running a trading desk in Sao Paulo. Nicolellis developed the idea of range bars, which consider only price, thereby eliminating time from the equation.
In addition to the placement of the components, the size of the bar matters, too. This is one of the things that make OHLC bars powerful technical indicators: they have built-in range finders!
The size of bars changes according to the economic pressures that affect the supply and demand for a currency pair. Here’s how it works for a given time period:
The distance between the high and low is named the trading range. Thus, an oddball bar that is different in size or component configuration from the bar preceding it should get attention.
When it is interpreted correctly, this simple symbol can be used to show turning points, trend lines, and support and resistance levels. Really, it is a swift, comprehensive expression of price movement. All relevant information is included.
While bar charts are not absolute in their ability to predict currency movements, they provide you with an important tool to better understand market movements. Do you think you will be using bar charts when trading? Our guess is that you will!
If not, perhaps one of the other chart types will suit your fancy. Just be sure that your chart is user-friendly and intuitive!
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