As we have covered before, fundamental analysis such as data and news are very essential. The two help traders get information about the state of the economy. As a result, they can use this information to predict how a currency or an asset will move. We have also covered about technical analysis. This is a method where traders use indicators to trade.
In this report, we will look at the importance concept of OHLC chart (one of the most common type of graph used in trading) and how you can use it to trade exploring some useful strategies.
What is an OHLC?
OHLC is a short-form of Open, High, Low, Close. These terms are self-explanatory and you have likely used them before.
The open is the price which the asset started the day at. For example, if you are trading Apple, the open price will be where the price starts the day. This price is determined by the demand and supply of the asset at the start of the day.
High is the highest level the asset has reached. For example, if Apple opened the day at $100, rose to a high of $120, and then started moving downwards, then the high of the day will be $120.
What is not an Open High Low Close
Forex and US OHLC problems
These concepts may sound easy. However, a closer look at them shows a few difficulties. For example, in forex, there are two main closes and open. There is the open price when the market opens on Monday and the close price when it shuts for the weekend on Friday.
The difficulty for finding these two is that the forex market is usually open for 24 hours every day. As such, it is difficult to ascertain the exact open and close prices.
There is also the same problem when you are looking at shares of companies listed in the United States. The problem is that it is very difficult for you to know the open and close prices because of the extended hours trading.
What Does OHLC charts means?
As a trader, knowing the OHLC prices is a very important thing. It is important because it tells you the range of the assets within the day. This range can help you identify the amount of volatility in the market.
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For example, if the open price of Apple is $100, its high is $101, the low is $99.5, and the close is $100, it means that there is no volatility in the stock. However, if the open is $100, high is at $110, low is at $95, and the close is at $115, it means that there is a lot of volatility on the company’s stock.
The three numbers are also important when you are applying indicators on the assets. When applying most indicators, you will often be asked to enter the price you want to use.
Most traders use the closing prices. Still, there are those who prefer using the open prices.
How to read and Apply OHLC Charts
The simplest way to use the OHLC bar is to use the Japanese candlesticks. These are the most common types of charts.
This is easy because a candlestick is essentially an OHLC chart.
A candlestick has four main parts as shown below. The parts not shown below are the upper and lower shadows and the body. A candlestick on a daily chart represents the OHLC during the day.
On platform like MT4 and our proprietary Ppro8, it is easy to update the OHLC. You do this by simply going to the properties and selecting show Open-High-Low-Close. This will show you these numbers at the top part of the chart.
Alternatively, you can go to the marketplace and download it.
You can also download the OHLC volume and histogram. These three tools are shown on the chart below. The OHLC have been highlighted in pink.
OHLC trading strategies
There are several day trading strategies when using OHLC bar charts. Broadly, the two main types of these strategies are technical analysis and price action.
Technical analysis is a trading strategy that uses charts and combines them with indicators. Indicators are based on mathematical calculations. Some of the most popular technical indicators used in analyzing OHLC charts are the Average True Range (ATR), Average Directional Movement Index (ADX), and the Relative Strength Index (RSI).
Price action, on the other hand, is the process of analyzing chart patterns with the goal of finding unique arrangements. The most popular of these patterns are bullish and bearish flags, bullish and bearish pennants, and triangle patterns.
Unlike other indicators like the RSI and moving averages, OHLC does not provide pointers as to where the price of an asset will move. Instead, it helps provide an indication as to how the assets are trading and the ranges to watch.
External Useful Resources
- How to create Candlestick (or OHLC) charts for share prices - The Data School