(Introduction to bar chart) Bar charts are like the superheroes of technical analysis. They're the most popular type of charts you'll find in books, magazines, and online. So, it's important to understand what each part of a bar chart means.
Imagine a bar as a tall, skinny rectangle. The top of the rectangle shows the highest price during a certain time period, while the bottom shows the lowest price. On the left side of the rectangle, there's a little line that shows the opening price, and on the right side, there's another little line that shows the closing price. So, a bar includes all four important prices: open, high, low, and close. Sometimes, people use the abbreviation OHLC to talk about these prices.
When you use software to make bar charts, you can choose how much time each bar represents. You can have bars that show
5 minutes,
15 minutes,
1 hour,
4 hours,
and so on. In Forex (which is a fancy word for foreign exchange), people commonly use bars that represent 15 minutes, 1 hour, 4 hours, and a whole day.
But here's a tip: if you're looking at a chart made by someone else, make sure to check what time period the bars represent. Unless it's labeled differently, you can usually assume that the chart shows daily bars. So, be careful and pay attention to the time parameter of the bars on a new chart.
The Four Bar Components
The "open" is the first price at which a trade is made during a certain time period. Usually, the open is similar to the previous closing price, but it can be important if it is very different. This is especially true if there is a gap between the open and the previous close. The chart below shows a pattern of gaps in the EUR/USD M1 chart. These gaps can happen because the market is very volatile or there is not enough trading happening at certain prices.
In the Forex market, we don't see many gaps on timeframes longer than 1 minute because trading happens almost all the time. The only times we see significant gaps are (1) when the Chicago futures pit session ends and the Global session reopens two hours later, and (2) from the Friday close in New York to the Asian open on Sunday. These are weekly gaps.
The "close" is the last trade made during the timeframe you choose for your chart. It is the most important piece of information because it tells us the final sentiment of that period. If the close is below the open and near the low, it shows negative sentiment. If the close is above the open and near the high, it shows positive sentiment.
Looking back at the first chart, you can see that the second bar opens at the high and closes at the low. This means that something happened during the day to make people feel negative about this security. It is likely that the next bar will have an even lower low, so it might be a good idea to consider a short position. On the other hand, if a bar opens at the low and closes at the high, it suggests that the next period of trading will see a rise in prices.
Bar Size
Hey there! Did you know that the size of a bar in trading is super important? Yeah, it's true! So, if the bar is really small, it means that not many people are interested in buying or selling. Bummer, right? But if the bar is tall and has a big difference between the highest and lowest points, that means there's a lot of interest from buyers and sellers. Cool, huh?
Oh, and there's this thing called the trading range. It's basically the distance between the highest and lowest points of the bar. If you see a bar that's totally different in size or looks compared to the one before it, you should pay attention to it. It's like an oddball, standing out from the crowd. So, keep an eye out for those oddball bars, they might have something interesting going on!
Hey there! So, here's something cool to keep an eye on: sometimes you'll notice a bunch of little bars on a graph that are only about 40 points tall. But here's the thing, usually the average range between the highest and lowest points is around 65 points. When you see these small bars, it means that people are kinda unsure about what to do next. It's like they can't make up their minds! But don't worry, this indecisiveness won't last forever. Eventually, there will be a big move in one direction or the other. If you have a hunch about what might cause this big move, like maybe some important news coming out soon, you can get ready and position yourself accordingly. Pretty neat, right?
There's this cool thing called a pattern in trading, and one of them is when you see a bunch of really big bars. It means that the trading action is super fast and intense. When we say "big bars," we mean they're way bigger than the usual ones. For example, if the average bar is 100 points, these big ones could be around 160 points! That's a big difference! But here's the thing, trading in such a wide range can be risky. You might end up losing a lot of money in just one day, and it's also exhausting. It's like running a race at full speed all the time. So, if you see these above-average sized bars in the market, be careful. It might not turn out as exciting as it seems.
Placement of the Bar in a Series
So, like, when we look at a bar on a graph, we can kinda guess how people are feeling about it based on the bars that came before it. If the bars keep going higher and higher, that's called an uptrend. And if the bars keep going lower and lower, that's called a downtrend. But, like, not every single bar has to be higher or lower. It's up to the person analyzing the graph to decide how many bars need to be higher or lower before they can call it a trend. On a daily chart, they usually say that 5 out of 7 bars is enough to call it a trend.