How to Read FOREX Bar Charts

Bar charts are the most widely used type of chart in security market technical analysis and date back to the last decade of the nineteenth century. They are popular because they are easy to construct and understand. These charts are constructed by representing intraday, daily, weekly, or monthly activity as a vertical bar. Opening and closing prices are represented by horizontal marks to the left and right of the vertical bar, respectively. Spotting both patterns and the trend of a market, two of the essentials of chart reading, is often easiest using bar charts.
Bar charts present the data individually, without linking prices to neighboring prices. Each set of price fields is a single island.

Each vertical bar has the components shown in Figure below.

[caption id="attachment_13080" align="aligncenter" width="550"]Anatomy of Single Vertical Bar Anatomy of Single Vertical Bar[/caption]

Figure below shows a daily bar chart for the EUR/USD currency pair for the month of June 2011. The vertical scale on the right represents the cost of one Euro in terms of U.S. Dollars. The horizontal legend at the bottom of the chart represents the day of the week.

[caption id="attachment_13081" align="aligncenter" width="550"]Vertical Bar Chart Vertical Bar Chart[/caption]

A common method of classifying the vertical bars is to show the relationships between the opening and closing prices within a single time interval as either bull or bear bars, as seen in Figure below.

[caption id="attachment_13082" align="aligncenter" width="550"]Anatomy of Bull and Bear Bars Anatomy of Bull and Bear Bars[/caption]

Graphically, an open/high/low/close (OHLC) bar chart is defined using the following algorithm:

OHLCM Bar Chart Algorithm

  • Step 1—One vertical rectangle whose upper boundary represents the high for the day and whose lower boundary represents the low for the given period.
  • Step 2—One horizontal rectangle to the left of the high-low rectangle whose central value represents the opening price for the given period.
  • Step 3—One horizontal rectangle to the right of the high-low rectangle whose central value represents the closing price for the given period.
One interesting variation to the standard OHLC bar chart was developed by author/trader Burton Pugh in the 1930s. His model involved connecting the previous set of quotes to the current set of quotes, which generates a continuous line representation of price movements. There are four basic formations between two adjacent vertical bars in Burton's system. (See Figure below.)

[caption id="attachment_13083" align="aligncenter" width="550"]Continuous Line Bar Chart Continuous Line Bar Chart[/caption]

These are often called swing charts. To see how they can be used by breaking them into four types, see Pugh Charts in Tools for Traders.

Bar chart interpretation is one of the most fascinating and well-studied topics in the realm of technical analysis. Recurring bar chart formations have been labeled, categorized, and analyzed in detail. Common formations like tops, bottoms, head-and-shoulders, inverted head-and-shoulders, lines of support and resistance, reversals, and so forth, are examined in the following sections.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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