The Importance of Charts in Trading: Visualizing Trends and Patterns
Charts are a visual representation of price data. This summary view facilitates the interpretation of periodic price changes.
Charts are often an auxiliary forecasting tool and sometimes – especially for technical analysts – a primary one. The most popular are line, bar, and candlestick charts. The x-axis marks the time indicators (e.g., day 1, day 2, day 3), while the y-axis shows the corresponding price values.
Line Chart
As the name suggests, the line chart draws a line between individual periods’ prices. The above chart shows a downward trend in EUR/USD plotted over daily closing prices.
Bar Chart
Bar charts provide more profound information than line charts. They depict high, low, opening, and closing prices. A vertical bar extends from the lowest to the highest price point. The nodes on the left and right represent the opening and closing prices, respectively.
Candlestick Charts
Candlestick charts are the most used type of chart. Their popularity is due to the wealth of information they contain.
Like bar charts, candlesticks represent the period’s opening, closing, high, and low price values. The body (the space between the opening and closing price) visually demonstrates the price change direction (in Chart 3, transparent when rising and white when falling). Tails, the extensions outside the body that mark the highest and lowest prices, also provide valuable price action details.
The technical analysis section will discuss various chart patterns and formations.
Conclusion
Line, bar, and candlestick charts are the three most used chart types. Technical analysts, who rely on chart patterns and indicators for their investment decisions, often use candlestick charts due to the extensive information these charts provide.
