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Understanding Financial Charts

Charts are at their very simplest a graphical impression of the movement of a price over time. The simplest form of chart is the line chart. It will tell you the price of a market at the given time and over a given period. A daily chart will show you what the price was at the close of each day, an hourly chart will show you the price at the end of each hour. This line chart example shows the daily price of the Euro/USDollar from March to September. We can tell that the Euro strengthened in March and April and has since fluctuated or ranged around the 1.2800 mark. Importantly, we only see the end of day price and we cannot see how much movement or volatility there is during each day.

For that we need to look at another type of chart called the bar chart. Our example shows the same period and again it is a daily chart. It does however show us a lot more information than the simple line chart. Perhaps because of this it looks a little confusing. Each virtical line or bar represents a day's movements. The top of the bar is the highest the price reached and the bottom is the lowest reached during the day. The opening price is signified by the small horizontal mark on the left of the bar and the closing price by the mark on the right of the bar. The simple line chart hides a lot of price information and gives a false impression of volatility, whereas the bar chart will show us exactly how high or how low a price moved. For example, take a look on the line chart and define when the highest price was reached during the period shown. It looks to be around May 10th. Now look at the bar chart and what do you see? It tells a different and more accurate story: highest price reached was actually 18 trading days later. Now look carefully at that highest bar around June 5th. It was actually a falling day, the Euro lost money to the Dollar even though the price moved through its highest for some time during the day. This is absolutley vital information that was lost to those using the daily line chart.

The third type of chart we shall look at is called the candlestick chart. It may not look the same as the bar chart but it shows us exactly the same information. You may have found the bar chart somewhat hard to read quickly, the candlestick makes it much easier. Take a look at this candlestick chart zoomed in. It is coloured in typical fashion, the green candles signal up days and the red down days. The top of the wick shows the highest reached each day and the protruding wick at the bottom is the lowest. An 'up' or green candle shows the opening price at the lowest part of the colour and the closing at the highest. Red candles are the opposite: opening at the top of the red part and closing at the bottom.
Using the zoomed chart take a look at the green candle following the red at the end of August. The green candle equals an up day, but, if we'd been trading in the right direction there's a good chance we'd have lost money because of the large fall during the day (shown by the long dangling wick).

Many people claim that candlesticks form significant patterns that predict price movements in various directions. This is highly contested. All I will say is that if you change your chart from a daily to a 4-hourly or 30-minute to 5-minute then patterns will usually change too. Of course, the price will make its own mind up where it wants to go! The chart images shown here have been taken from MetaTrader screenshots. This charting software is absolutely brilliant. It is very easy to customize and enables you to add all sorts of analysis aids. Best of all it is completely free to download and use.