Forex: Why Use Candlestick Charts?

Filed under: Learn Forex Trading |

You may (or may not!) be surprised to hear that candlestick charts are a relatively new way of looking at price data. Before that, both line charts and point and figure charts were popular, and they still are. However, I believe that candlestick charts are a significantly better way to look at price data.

Line charts are limited because they only tell you the price data for the close of whatever timeframe you are looking at. Take a look at Figure 1. This is a line chart. What you are looking at is the closing price of a 4-hour chart. So every 4 hours, the closing price is recorded, a tiny dot is made on the chart, and a line is connected from the last dot made on the chart. What you get, after several of these connected dots, is a line moving up and down. This gives us a very limited view of the market.

A point and figure chart (shown in Figure 2) gives us much more information about what is happening to the market, and in many respects, this kind of chart is very similar to a candlestick chart. You get the open and close price of each block of time (which in this case is 4 hours), plus the high and low of each session. This is exactly what you get on a candlestick chart. However, a candlestick chart is much easier to visually digest and make sense of.

Figure 3 shows a candlestick chart. It is exactly the same data as Figure 1 and Figure 2. However, white candles shows when price moves up, and black candles show when price moves down. The wicks of the candles also jump out at us, and large wicks (pin bars) tell us that a level in the market has been rejected.

 

I prefer candlestick charts to any other kind of chart, as they give us so much more information in a clear and digestible way. Whether you use them as well, is entirely up to you…

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