Trading charts

On first encounter, Heikin-Ashi bars may look very similar to the candlestick chart. But, there is a significant difference between the two. Heikin-Ashi, which more or less translates from Japanese as ‘average pace’, gives you an indication of price averages – and their changes – over a period.

Heikin-Ashi charts are smoother than candlesticks and, rather than offering an exact price at any moment, are often looked to for determining general trends over longer timeframes. The opening price of a Heikin-Ashi bar is the mid-point of the previous bar, and the closing price equals the average price for the current time period.

In short, each Heikin-Ashi bar shows you the direction and magnitude of every period’s change in average price level. For example, a long green bar will indicate that the average price has increased substantially. Conversely, a long red bar tells you that the average price in the market has dropped significantly.

The next type of chart, HLOC, which stands for ‘high, low, open, close’, shows exactly the same data as a candlestick chart, but in a different way:

• The open price is represented by the horizontal notch to the left of the vertical line
• The close price is represented by the horizontal notch to the right of the vertical line
• The high price is the uppermost point of the vertical line
• The low price is the lowest point of the vertical line

Once again, the line will be green if the market moved up over the given period, closing at a higher price than it opened. It’ll be red if the asset’s price decreased over the given period, closing at a lower price than it opened. In the instance that the market opens and closes at the same level, a chart formation known as a ‘doji’ will be shown. Doji’s look like crosses, and because neither green nor red can be applied, they will appear in black.

Unlike a candlestick or HLOC chart, a line chart only shows the close price for the time period you have selected (eg one hour). The close prices are joined together so that the consecutive points form a line.

This is a very simple way to display pricing data as it does not give any indication of what the high, low or open price for the period was. For this reason, many traders only use line charts when assessing long-term trends, where some of the additional information may not be quite as relevant as it is when trading short-term patterns.

When trading short-term volatility, such as in a highly liquid forex market, you’ll want to know the extent and pace of price movements, as well as the exact price of the market at any given moment – meaning that a candlestick or HLOC bar chart will be a better source of data.

The final type of chart is a mountain chart. This is the same as a line chart, except the area beneath the line is shaded, giving it the appearance of a mountain in silhouette. Like line charts, this type is mainly used to assess long-term trends, as the high, low and open prices for each period are not on show.

The shaded ‘mountain’ gives you a quick impression of the shape of the market and its volatility – frequent peaks and valleys, with steep gradients, indicate higher levels of volatility, while smoother gradients suggest more stability.

Technical indicators that are drawn directly onto charts – Bollinger bands, for example – may be easier to read when applied to mountain or line charts than candlesticks and HLOC bars.