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PTMC team 05.11 2014

Which chart type is the best for trading? Candlesticks, bars, line or Renko in Protrader

Hello, Protraders!

Beginner traders often ask which type of chart is better, which one is worth using, and on which one they should focus. In underlying article I would like to write couple words about most popular chart styles and I will try to present pros and cons of each method of price display.

Each chart is nothing more, nothing less, than just a graphic way to visualize distribution of price of certain instrument in certain time. Initially, traders using charts were very rare, only single investors were trying to do it including probably the first Price Action guru, Munehisa Homma, who was trading rice in Japan in 17th century. He is considered a father of Price Action and candlestick charts but also one of most epic traders in the history. It is probable, that his success is connected with the idea of making and reading candlestick charts and this idea was to give him an edge on market.

It's not hard to believe, that charts were made mainly for visualizers who tend to be estimated 90% of population. Chart is way easier to interpret intuitively and to follow price's behavior, than just mere sequence of numbers changing up and down, slower or faster. What's more is that chart allows us to track the history in a logical, continuous manner and people like to connect events into cause and effect streams - logical or even apparent like superstition.

Line chart is the simplest type of chart. The line connects points in regular timeframe (i.e. 1-hour) and vertical value, the price, is assigned to these points in one of couple ways - last price level during timeframe period (close), median, high, low, etc. First what you will notice with that type of chart is lack of information about price movement in the meantime.Line is pointing to one, particular price value while other price levels are ignored. In example: If last price quote during 1 hour period would be 1.0000, then line chart set to show close prices will indicate that exact price level. It won't matter that price slid over 50 pips and then went up 30 during that hour.

Line chart

It is a justified objection that line chart provides only fractional information. However, some traders consider it as an advantage arguing that such chart is clearer and free of noise. They say that line chart shows market's bias very clearly.

Solid chart seems more evolved version of the line chart. These two charts behave identically and the only difference is that solid chart got field below colored. This way visual perception is significantly changed. Solid chart is worth considering if you trade assets where some tangible asset is being priced, like: stocks, commodities, metals, etc. A drawback of such chart is very similar to the line chart, as the work similarly.

Solid chart

Bar chart is a bit more complicated than previous two. Bar shows us open and close prices as well as price range in certain timeframe. This is great advantage as it provides plenty of information about price action in a time when bar was forming, and it shows us how far did price go up and down what might be crucial for placing Support / Resistance levels or Stop Loss orders. Some of a flaw might be the fact that range is dominating the visual side and open / close level of each bar is way harder to notice on chart full of bars. Bars seem particularly interesting in low time-frame trading where swings and wave patterns are more important than single bar's shape.

bar chart

Candlestick chart, like bar chart, is an OHLC type of chart - meaning Open / High / Low / Close. Candle marks open, high, low and close during certain time period. But the distinctive feature here is colored body which is simply a bold, colored space between open and close, where color basically depends of relation between open and close. If close is lower than open (down candle) then it means that bears were in charge and candle is red by default, but when close is higher than open, then we assume that bulls won the match and such candle is painted green. Such solution improves our perception of price action than in case of bars, as we see colors and bodies dominating the chart, which may be somewhat distracting. However, the great virtue of candles is that they are easy to read price action patterns where wicks and bodies correlation is highly important.

Candlestick chart

Sometimes more advanced traders are interested in other, somehow exotic types of charts like Renko. This type of chart is based only on volatility while ignoring the time factor. So Renko is based on price movements. You need to set Renko pip/tick value new ones will appear after price has changed by certain number of pips/ticks. That way all bricks will have a fixed height. Small price movements won't make any change to the Renko chart, they won't be marked unless they meet volatility criterion. Therefore, lazy day may have only couple bricks while volatile day may be filled with dozen or more. Note that there is no timeframe on Renko chart and one brick may be formed in a minute or 1 hour or more, depending on market's mood - lazy or choppy. Moreover, price movements smaller than preset value are not shown on the chart at all. Such method of displaying price action seems very extreme in focusing on volatility and ignoring the time factor. It may be both great advantage and great disadvantage. Renko chart filters out the noise and tight range periods as well as it helps to recognize the current trend, but on the other hand most conventional technical analysis tools will prove useless here and market's sentiment will be harder to determine.

Renko Chart

I find questions from time to time – «Which chart type is best for trading? » Most often it's from beginner who is trying to learn the basics. But actually, that question is not an easy one to answer. Trader need to consider all pros and cons of each chart type in context of his strategy, trading style and personal characteristic as there is not a one, ideal type of chart there that would fit everyone.

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