When it comes to 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.
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. The anatomy of a price bar is simple yet informative: a vertical line captures the highest and lowest traded prices within the period, while small horizontal ticks to the left and right mark the opening and closing prices, respectively. This is essentially what OHLC means.
To understand bar charts better, you need to understand what timeframes are. A timeframe is a unit of time through which the market exchange rate is measured. If you’re on the 1-hour timeframe, for instance, every bar you’ll see on the chart will represent the price movements within that hour. The bar will represent the opening, closing, highest, and lowest price levels within every single hour.
On the price chart, each OHLC bar is represented with a positive or negative connotation. Although not technically bar patterns (we will go into that shortly), they are differentiated as follows:
To help you visualize things better, your charting platform will represent each candlestick with a color depending on its sentiment. Bullish candlesticks may be green or white while bearish candlesticks may be red or black.
Let’s break down the forex bar chart, commonly known as an OHLC chart. It’s a straightforward concept, reflecting the opening (O), high (H), low (L), and closing (C) prices of a currency pair. This simplicity is what makes bar charts a cornerstone of technical analysis.
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.
With the understanding of each line and tick on the bar chart, visualizing the complete picture becomes much easier. No matter what you may be trading in the financial markets, an OHLC bar chart appears as illustrated below.
It’s refreshingly uncomplicated, isn’t it? 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!
In our previous example, you saw how an OHLC chart uses vertical lines to display a currency’s trading range over your chosen time frame, with accompanying horizontal lines denoting the open and close prices.
Bar charts are flexible, allowing for various time frames to suit different trading styles: from 5-minute to 15-minute, 1-hour, and 4-hour intervals, right up to daily charts.
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 are not just about highs and lows; they also indicate price direction and the extent of its movement within the bar, offering insight into market sentiment. 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!
Here are the advantages and disadvantages of bar charts.
Best for: New and intermediate forex traders
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