The line chart is perhaps the most fundamental form of charts used in Forex trading. It consists of a time intervals represented as symmetrical lines along the X-axis and the price value is charted along the Y-axis.
Every time a new time interval appears, a straight line is drawn from the last recorded point of price value at the previous time interval to the new point. The continuous interconnection of the points creates a line graph.
However, the line graph reveals very limited market data. It shows only the closing point of each time interval and not the opening point.
Due to the scarcity of information that it provides, line graphs are rarely used today for keeping a tab on the price movements in the market.
After the line charts, come to the slightly improved version of charting know as the Bar chart. It offers a little more data than plain line chart. Similar to the line chart, the X-axis corresponds to equal intervals time. The time frame that you pick would determine the price value on the Y-axis of the chart.
Primarily four kinds of data are represented in the line chart:
High Price: The highest price the bar reached during the time it was open.
Low Price: The lowest price the bar reached during the time it was open.
Open Price: The left lug is the price the bar opened at.
Close Price: The right lug is the price the bar closed at.
The traders can make more confident trading decisions with the information that is made available with line graphs. The traders can clearly see what happened in the market prices during the whole session of the bar.
The candlestick charts are a more improved version of the line chart that displays the same 4 points of data but more efficiently. They are the most preferred charting option among Forex traders today. I will tell you more about the Japanese candlesticks chart in the next chapter.
When you look at the Forex charts from a theoretical perspective, the closing price of a previous bar should match with the opening price of the next bar. However, this does not always translate to reality.
Price fluctuations that can happen even in a span of a few milliseconds can cause a phenomenon known as a “price gap” which is a gap between the opening price and the closing price of two adjacent bars.
Normally, the gaps between the bars on a normal, uneventful day is so small that they are hardly noticed. However, sometimes major financial news that is released during the weekends can have a major impact. The shocking news releases can cause a gap between the two bars that are large enough to be noticed.
This was a massive gap is caused between the closing price of Friday’s candle and the opening price of next Monday’s candle.
Take a look at the picture. The opening and closing prices between the two adjacent bars do not line up. This happens because the weekend causes a gap between the bars.
The worst thing that can happen is this weekend can coincide with your stop loss and skip over it. This can lead to heavy losses. On the other hand, it can similarly cause significant gains due to the price gaps. However, most traders do not like taking that kind of risk with their money.
In the next, I will discuss the Japanese Candlestick, the most popular price chart format used by most Forex traders.