If you want to improve your trading skills, you have to learn how to read bar charts. You have probably seen them on your exchange website many times and wondered what they meant.
In this article, we will find the information you need for understanding this type of chart, which is very common.
Bar charts may be confusing for a beginner, but they provide a lot of useful information to a trader who knows how to deal with them. If you base your decisions on what these charts say, you are likely to earn more. They show if the price of the asset is rising or falling, and let you evaluate its dynamic within a set period of time.
Luckily, interpreting bar charts is not rocket science. The key principles here are focus and consistency. Learn how to read bar charts and apply this knowledge daily, if possible.
First, let’s see what they look like.
A typical bar chart resembles a city skyline, with many skyscrapers standing next to each other. These towers are called bars. They feature the same width but vary in height. Each bar shows us how the price of a certain asset behaved within a determined time interval.
Bar charts can use two colors — red and green (or black). On the example below, green bars indicate price increase and red ones — price decrease.
To understand how to read a bar chart, let’s see what its basic elements mean.
A bar chart consists of opening foot and closing foot. It includes open, high, low and close prices within a specified interval. You set this interval yourself, according to what you need to see.
Example: A trader has set a 1-hour bar interval for the chart. It means s/he will see an updated bar every hour. Each time it will be displaying the open, high, low and close price within a 1-hour frame.
When setting this interval, a trader can measure it not in time, but in the number of transactions. In this case, a new bar appears after a set number of transactions with this particular asset has taken place.
There are two types of bar charts — OHLC Bar charts and HLC Bar charts. These abbreviations stand for Open-High-Low-Close and High-Low-Close, respectively.
OHLC charts are more common and display the info about open, high, close and low prices, as you have probably guessed. HLC skips the open price, meaning High-Low-Close.
Now, we will explain what all these terms mean.
They appear as 2 short horizontal lines. The first (Open) extends to the left and signifies the first price traded within the given bar. The second (Close) is the last price traded during the same bar.
They are the top and the bottom of the vertical bar, displayed on the chart. High/Low represents the highest/lowest price traded during the given bar.
If you know how to read a bar chart it will inform you in which direction the price of the asset moved during the period you set (i.e. during the bar). It would be enough to see where the opening and closing feet are located. If the price has raised, the closing foot will be above the opening foot. The opposite picture (with the closing foot below) indicates the downward progress of the price.
As for the price range, it’s easy to assess, too. It’s the difference between the top and bottom of the vertical bar on the chart. Just do some simple math.
Setting the right time interval for your bar chart is essential. It determines the degree to which your data is compressed. The smaller the interval, the less is the data compression and the more detailed is the picture.
If you set a 1-day interval, your daily data will be compressed to display every trading day as a separate data point. If you set a week or a month, you will get a bigger picture but fewer details. The choice of the time frame depends on your personal goals and trading style.
This type of trading chart is very convenient if you have a lot of data to display. For instance, with a candlestick chart, hundreds of data points will take a huge amount of room. It’s because a stick (called ‘real body’ for a reason) is rather thick. The resulting picture will be somewhat crowded and hard to analyze.
As for a bar chart, the bars it uses are thin, neat and informative. Thus, you can fit a lot of information into such a chart without making it cluttered.
The information both types of charts deliver to us is basically the same, but the visual representation of it is different. What you choose depends on your needs and preferences.
Reading a bar chart may seem a little complicated at the beginning, but it will be easier if you take some practice. Just memorize the positions of the Open and Close, High and Low and remember what these marks stand for. In a while, you will be able to read it at a glance.
Hopefully, now you see a bar chart like a useful trading tool and not a challenge.