The movement of any financial instrument over time needs some kind of graphical representation, mostly because humans are good at visual interpretation and suck at number crunching. In our case, we focus on the price movement of a currency pair in the forex market. The simplest form of graph (or chart) is to plot to price as a function of time. This will give you the known zigzag movement once sees in comic strips. There’s a slight catch though, the price changes every second or even less! Thus to represent a day’s movement we need about 90′000 points. That’s probably why candlestick and OHLC charts have been developed: they allows the graphical summarisation of the price movement for any time frame.

If we divided price movements into e.g. 10 minute intervals, then the price can only make two things in that time: it can increase or decrease. Together with the open and closing price (the first and last price change in the 10 minutes) this makes four price information: open, high, low, and closing price.

OHLC Chart

The image above is an example of a OHLC chart. Every green bar represents one time frame, e.g. 10 minutes. The dash on the left of a bar is the open price, the high tip of the bar is the high price, the same for the low point, and the closing price (right dash). A neat summary and abstraction of price movements over time.

Another representation of such an OHLC chart are the famous Candlestick charts, where the open and closing mark in the chart above form a body, and the high and low mark form an upper and lower shadow or wick. Candlesticks represent exactly the same information like OHLC, just that it might be a bit easier on the eye to recognise up and down movements. In a down candle, the closing price is lower than the opening (i.e. the market moved downwards) and in an up candle, the closing price is higher than the opening price (the market moved upwards). Usually, the bodies of up and down candles have a different color or shade for easy recognition.

Candlestick Chart

Here, the bodies of up candles are drawn green, down candles are red. The combination of up and down candles together with their shapes (long and short shadows) let you interpret the so called price action and can give you good clues what is going on in the market.

How to read price action with candlestick charts will be discussed in a next article.


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