How to Read FOREX Bar Charts
Each vertical bar has the components shown in Figure below.
[caption id="attachment_13080" align="aligncenter" width="550"] 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[/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[/caption]
Graphically, an open/high/low/close (OHLC) bar chart is defined using the following algorithm:
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.)
OHLCM Bar Chart Algorithm
- Step 1âOne vertical rectangle whose upper boundary represents the high for the day and whose lower boundary represents the low for the given period.
- Step 2âOne horizontal rectangle to the left of the high-low rectangle whose central value represents the opening price for the given period.
- Step 3âOne horizontal rectangle to the right of the high-low rectangle whose central value represents the closing price for the given period.
[caption id="attachment_13083" align="aligncenter" width="550"] 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