Analyzing bar charts

In the previous lesson, we discussed constructing bar charts in-depth. Technical analysts consider it a fundamental factor that is often used. So, in this lesson, we’ll be discussing the price charts and ways to analyze them. By learning it, you can maximize profits.

OHLC and HLC were discussed in the previous lesson. Nevertheless, let’s rewind what we learned.

The following image will help you understand the meanings of essential points.

(Now, let’s check the four combinations of bar charts that are often used. These are known as:

• Up day – this is when the high and low points are higher than the previous bar shown
• Down day – this is the opposite of up day as the high and low points are lower than the previous day.
• In day – if the high and the low points of the present bar is within the previous bar’s range, it is an in- day.
• Out day- being the opposite of in- day, if the high point is higher than the previous bar and low point is lower than the previous bar, it is an out day.

Check the image below to understand this better.

If you analyze these charts correctly, you will be able to identify trend lines and support/resistance levels, as well.  These charts are essential to analyze market movements and price.

There are a few terms that you must be thorough with when analyzing bar charts. You might have learned a few of them in the previous lessons, but let’s take a look at them to see whether we have missed anything.

What’s a bar?

Bar charts mainly comprise of vertical bars, and they indicate the trading range for a specific period. This could be within a day, a week, or even a month. While you know what OHLC means in a bar, some charts also use a color code for these bars. Usually, a black bar indicates the price that is rising, whereas a red bar shows that there is a decline.

What’s the trend?

When analyzing charts, the common assumption is that prices go up and down in patterns that are recurring and usually predictable. This then forms a trend that makes it easier for us to analyze. By looking at prices which either ascend or descend, you can identify whether if it is an uptrend or downtrend.

What’s a reversal?

Two common patterns can be denoted as reversals. A pattern like a letter M shows a price rise, fall, rise, and fall again, which is a downward trend. The other pattern is the letter W, which indicates a fall, rises, falls, and rises again, which depicts an upward trend. These are important because they can signal and point buying or selling opportunities.

What are resistance and support?

Both resistance and support are crucial in technical analysis. This means both resistance and support are essential for bar charts, as well. During the process of analyzing bar charts, these levels play a significant role.

However, Resistance is nothing but the difficulty of breaking an upward trend as it is hard to break the price level.

Support, on the other hand, is when a price does not pass through a decline. Bar charts show both resistance and support points, and depending on your trade position, you can either buy or sell. It’s always advisable to practice with paper trades and understand chart patterns before investing real money.

We taught you in the previous lesson about the points in a chart and especially for day trading. Let’s have a look at what they mean. We will take the OHLC bar chart.

• Open – this means the first price it was traded at.
• High – this is the highest price it was traded at.
• Low – this is the lowest price it was traded at.
• Close – this means the last price it was traded at.

If you want to know the direction, if the closing is above the opening in comparison to the previous bar, it is an upward trend. In contrast, if the closing is below the opening, it is a downward trend.

In many charts, upwards are green color whereas downwards are red. You can also find the range by subtracting the high from the low. Bar charts also have a volume, which is another essential factor.

Wrapping up

You can’t expect foolproof indicators or strategies in Forex trading because there aren’t any. The same applies to analyze bar charts as you can’t always expect profits from it. You might experience unexpected returns from bar charts. Therefore, you shouldn’t assume to make quick money.

As we have already learned, there are chances for you to come across complex situations. Charts might not be clear as you want them to be. You should use technical analysis to forecast prices as it will help you stay on track. However, accept the fact that even by using bar charts, you can’t expect 100% returns.