The Different Types of Charts you can use with CFD Trading
It is probably fair to say that only a genius would be able to trade CFDs successfully without having access to charts. We are indeed fortunate at the beginning of the 21st century to have computers at our disposal with which we can draw a price chart of every stock, commodity or currency we want at the click of a button. Traders of yesteryear often had to literally draw their charts by hand, connecting the dots manually from information they got from their daily newspaper.
Types of charts
Although there are many other types of charts, this discussion will focus on those most commonly used by CFD traders: line charts, bar charts and candlestick charts. All of them provide different levels of information, yet each one has its ardent followers.
The line chart
The simplest of them all is the trusted old line chart. A line chart is drawn by simply connecting the dots representing closing prices. These prices are available for any time frame the trader wants: monthly, weekly, daily, hourly or even by the minute.
Fig. 11.08(b) below is a typical line chart of the GBP/USD.
Despite the fact that the line chart offers limited information about price moves, it remains popular for one reason: its simplicity. Without the clutter of opening prices, closing prices, daily movements and colours it is often easier to get the big picture from a line chart than from one of its fancier counterparts.
The Bar Chart
The bar chart provides a lot more information than a simple line chart. As the name implies, it consists of a series of vertical bars. The top end of every bar represents the highest level the price reached during that particular time period; the lower end represents the lowest price; the tick marks projecting from the side of the bar indicate the opening price (on the left) and the closing price (on the right) for the specific trading period.
Fig. 11.08(d) below represents a typical bar chart.
Japanese Candlestick Charts
When it comes to CFD trading, candlesticks can most likely be called the king of charts. Probably more traders use them on a daily basis than any other type of chart.
A typical candlestick chart looks like this:
A candlestick chart doesn’t really provide more information than a bar chart – it simply provides the available information in a more appealing way. In the above example an ‘up’ day is represented by a yellow bar and a ‘down’ day by a red bar.
The thick section of the bar represents the opening and closing prices: with a yellow bar the opening price is at the bottom of the thick section and the closing price at the top. With a red bar this is reversed. The thinner sections represents the highest and lowest prices for the trading period respectively.
Groups of bars often form patterns, such as triangles, which many traders believe have special significance. A whole new field of study has evolved around these patterns. Whether this is science or voodoo remains a matter of debate.