One of the first steps to becoming a competent technical trader is to choose a suitable chart type. Active traders enjoy a variety of alternatives, from basic line charts to more sophisticated constructs such as point and figure charts. With this many choices, novice market technicians can be easily overwhelmed. Let’s take at the ins and outs of the OHLC chart and the functionality of candlestick charts.
What Is an OHLC Chart?
An open high low close (OHLC) chart is one of the most common chart types in use today. As the name implies, each price bar notes four pieces of information: the periodic open, high, low, and closing price.
Like all technical indicators, OHLC charts offer distinct pros and cons.
Traders may apply an OHLC chart to any time frame and any market. The price bars themselves illustrate market state because larger OHLC bars suggest enhanced volatility. Also, OHLC charts may be color coded for enhanced usability. Bars with a close above the open are frequently colored green, and close below open may be shaded red.
If not shaded, price bars have a neutral appearance. Also, OHLC charts are not overly useful in determining periodic traded volumes. Smaller bars can be difficult to read, requiring additional study to ascertain the OHLC values.
What Are Candlestick Charts?
Japanese candlestick charts originated at the Dojima Rice Exchange in the 1800s.. Introduced to western traders by technician Steve Nisson, candlesticks consist of three parts: an upper wick, lower wick, and body. The body is defined by a periodic opening price and closing price.
Here are a few of the key pros and cons of candlestick charts:
Candlestick charts are ideal for pattern traders. Trading ranges are easily discernible because price action is visually apparent in each candle’s wicks and body. Positive candles (close>open) are typically colored green, whereas negative candles (open>close) are shaded red for ease of use. Like OHLC charts, traders may apply candlesticks to any market on any time frame.
Understanding how to recognize candle-specific patterns in real time takes significant study. The visual appeal of candlesticks also frequently leads traders to see patterns and formations that aren’t really there.
Which Chart Type Is Better: OHLC or Candlestick?
One technical indicator, tool, or chart type isn’t inherently superior to another. Each is focused on placing price action into a manageable context—that’s it. The best technical tool for the job depends on the style of trading and the strategy you’re implementing.
For instance, let’s assume you’re interested in trading harmonic chart patterns such as the ABCD or shark formations. Given this methodology, either OHLC or candlesticks will work just fine. However, if you want to trade candle-specific formations—such as the hanging man, Doji, or harami—then you must reference candlestick charts.
On the other hand, you may be a pure price action trader. In this instance, the simplicity of an OHLC chart may be just what the doctor ordered.
The important thing to remember when choosing between OHLC bars and candlesticks is suitability. Your chart type must provide the information necessary to execute your strategy competently. Ultimately, it’s up to you to determine whether candlesticks or OHLC bars are ideal for your approach to the markets.
Want to Learn More About Chart Patterns?
Chart patterns are among the most frequently used technical indicators. Within this discipline, candlestick patterns are the go-to strategy for many active traders.
To learn more about how to trade candlestick chart patterns, check out the free StoneX e-book 12+ Candlestick Formations Every Technical Trader Should Know. In it, you’ll learn how to recognize, interpret, and trade more than a dozen powerful candlestick patterns. If you’re an aspiring pattern master, download your free copy ASAP.