Forex traders use charts to determine market direction and possible purchases or sales of currency pairs. There are three types of charts that are commonly used in Forex: linear, candle, and bar charts. Bar charts or histograms show how the prices moved over a specific period of time. These diagrams are also used in the stock, bond, option, index, and futures trading.
What Is a Bar Chart?
This type of chart reflects the opening and closing prices, as well as the highs and lows for a certain time period. The base of the vertical column indicates the lowest price for this period of time (minimum), and its top indicates the highest price (maximum).
In general, the vertical column indicates the trading range of the currency pair or another asset in the selected time interval. A small horizontal line on the left side of the column is the opening price, and on the right side, respectively, the closing price. The length of the bar indicates the maximum and minimum values that the price reached in a given period of time.
Bar charts are also called OHLC (Open High Low Close) charts, because they point to the Open, High, Low, and Close level for the selected currency pair.
Color coding can be used to identify bars with the close price above the open price (bullish or ascending bars) or below it (bearish or descending bars). If the close price is above the open price, the bar may be colored black or green; if below, it could be colored red. Such color coding gives traders a clearer overview of trends and price movements. Color coding is available as an option in most charting platforms.
Traders and investors decide which period they want to analyze. A 1-minute bar chart, which shows a new price bar each minute, would be appropriate for day traders. A weekly bar chart, which shows a new bar for each week of price movement, may be helpful for long term investors.
Why Bar Charts Matter
A bar chart can show traders and investors lots of useful information.
Long vertical bars indicate a big price difference between the high and low of the period. It means that volatility increased during that period. Short vertical bars show that there was little volatility. A big distance between the open and close price is a sign that the price significantly moved. If the close is far above the open, it indicates that the buyers were very active during the period, and vice versa.
The bar chart does not only provide a direct visual image of how profits are distributed in a portfolio. It is also the basis for further in-depth analysis.
For example, it can help answer these questions:
Do higher returns result from the same market conditions, or at least they appear at a time when the market has similar characteristics?
Are they tied to the same financial instruments?
If so, did it happen because these instruments have volatility, or because you traded them during a highly volatile period, or as a result of controlling the size of a position?
After you try to fully restore the portfolio/market characteristics associated with the largest and smallest observables, try to analyze also the associated trading decisions. Regarding negative observations: have any mistakes been made on your part that you could objectively avoid? The same applies to those days when profitability was especially high: did you do everything you could to make the most out of the favorable trend that you had? Answer these questions as fully and objectively as possible - and along the way, you can learn a lot.
If you realize that for quite long time periods you still have a great number of negative extreme values, then you should immediately analyze such dynamics and draft an effective risk management plan. If there are no fundamental flaws in your approach to risk management, then large losses can result from any excesses in the markets where you operate.
Excesses are characteristic of many markets - especially if we talk about a sufficiently long term; this mainly concerns international capital markets and most emerging markets. If you have an opportunity, test this hypothesis in your market by charting the distribution of the daily yield of the most actively traded securities. Do they have sharp deviations from the usual pricing model? If so, then it is very important to manage the size of positions associated with these securities, considering additional exposure to risks.
In any case, if you see that negative extremes of return still remain, then you will need to reduce your risk profile. The results are worth it - extreme negative values of the indicators and their impact on your entire trading cycle will decrease dramatically.
Bar Chart vs. Candle Chart
A bar diagram is quite similar to a Japanese candle chart. The main difference is in the visual look. A bar chart consists of a vertical line with small horizontal lines on the left and right displaying the open and close. Candles also have a vertical line that displays the high and low of the period, but the difference between the open and close is represented by a thicker portion called a real body. The body is shaded or colored red if the close is below the open, and is white or green if the close is above the open.
Together with linear and candle charts, bar charts are often used by Forex traders to analyze price fluctuations within a specific time period. However, this type of diagrams can also be used with other assets, such as stocks, bonds, options, futures, etc.
Bar charts have four key price indicators: Open, High, Low, and Close. The diagrams use color coding to determine bars with the close price above the open price. In addition to the visual representation of price changes, the charts can give traders and investors lots of useful information regarding their trading strategy.