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Now, let’s study price in a little bit more detail…this stuff is for the newbies…please skip this section if you think you know!
What is price?
Price is the value given to a particular instrument usually in monetary terms and its value is dependent on supply and demand.
- If the demand is more, price increases as more traders start buying and driving prices up.
- Demand zones on your price charts are around support levels, that’s where buyers come and start buying and driving prices up!
- If there is an oversupply, price falls as there are more sellers and fewer buyers.
- Supply zones on your charts are on and around resistance levels where sellers come in and drive the prices down due to the fact that there are very few buyers.
Every time you open up your charts, all you are seeing are the forces of supply and demand at work!
If the market is going up, what does that tell you about the demand and supply then? It means there’s a lot of demand for that instrument.
Or what if the marketing is going down then what does that tell you about the demand and supply then? There’s a less demand and lots of supply.
But there’s something else about price…it has a time component.
So the price of something today will not be the same tomorrow or in a month or in a year. Supply and demand over time drives up and down the price.
But how do you represent the value of price over time which in turn tells you of the supply and demand forces?
Answer: You need price charts: price bars, candlestick and line charts. These are a graphical and visual representation of price over time, thus telling you a story about supply and demand forces over a certain time period which can be 1 minute up to one month or year. Now let’s look at the charts.
Technical analysts use many tools and techniques. The main one is the chart. A chart represents price behaviour over time.
There are 3 main types of charts used and they are:
- candlestick chart.
- bar chart,
- line chart.
The building block of a candlestick chart is a single candlestick that looks like this:
When you have a group of candlesticks forming over a certain period of time then this forms a candlestick chart:
A candlestick chart simply looks like a candle, that’s why its called by that name…candlestick chart.
The information revealed in a candlestick chart are:
- the open price
- the high price
- the low price
- and the closing price
Additionally, the length of the “body” of the candlestick gives you an idea of how far away the price has moved from the opening price before it closed and this tells you a lot of things like:
- how strong the price move was during that period if the closing price is far away from the opening price.
- how weak the price move was if the closing price is closer to the opening price.
The candlestick chart is more appealing to many traders and it is the most popular charting and tool used the by traders.
The building block of a bar chart is a single bar:
When you have lots of bars form across a certain time period then you have a bar chart:
A bar chart simply looks like a bar, that’s why its called a “bar chart”.
The information shown in a bar chart is exactly the same as a candlestick chart:
- open price
- closing price
- high price
- low price
The only thing here is that the bar chart does not have a body…its just like a stick.
Bar chart is the 2nd most popular chart used in trading by technical analysts.
A line chart is a really simple chart that is just made of one line connecting either the open, high, low or close of prices. It is most often a line connecting the close of prices:
If you have a line connecting a serious of open, high or low or close of price over time, this gives you a line chart:
In reality, a line chart is would be rarely used in trading as it does not give you a much more fuller detail like the candlestick or the bar chart.
Comparing Candlestick Chart vs Bar Chart Vs Line Chart Side By Side
Let’s look at them side by side and see the difference, shall we?
The following chart is the same price chart information of EURUSD as represented by candlestick chart vs bar chart vs line chart:
- candlestick charts are very popular, used by many traders
- bar char are also popular and used by traders
- line charts, rarely used for trading.
- technical analysts use candlestick charts and bar charts for their analysis (rarely line charts)
You can read more about candlesticks here or by clicking the link below
Explore The Chapters In The Price Action Course
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