Introduction

In this lesson, we'll explore five major chart types, their construction, advantages, limitations, and ideal use cases. We'll also discuss how combining different chart types can provide a more comprehensive view of the markets.

1. Candlestick Charts

As we covered extensively in Lesson 1, Japanese candlestick charts are the most widely used chart type in modern trading platforms.

Construction

Each candlestick represents four key price points during a specific time period: the open, high, low, and close prices. The rectangular body shows the range between opening and closing prices, while the upper and lower shadows (wicks) show the highest and lowest prices reached. This rich visual representation allows traders to quickly assess market sentiment during each period.

Advantages:

• Rich in information, showing all four price points (OHLC)
• Excellent for pattern recognition and price action analysis
• Reveals market psychology and sentiment shifts
• Forms the basis for numerous trading strategies

Limitations:

• Can be visually "noisy" in volatile markets
• May be overwhelming for absolute beginners
• Requires training to recognize patterns effectively

Best Used For:

• Detailed price action analysis
• Identifying reversal and continuation patterns
• Day trading and swing trading
• Markets with sufficient liquidity and volatility

2. Bar Charts (OHLC Charts)

Bar charts, also known as OHLC (Open-High-Low-Close) charts, represent an alternative to candlesticks while providing the same four price points.

Construction

Each bar in an OHLC chart consists of a vertical line representing the high-low range, with a small horizontal tick on the left side showing the opening price and another small horizontal tick on the right side showing the closing price. This streamlined representation delivers the same essential information as candlesticks but with a different visual emphasis.

Chart analysis purists who prefer a more "stripped-down" view of price action often favor bar charts. They're particularly useful when comparing several charts simultaneously, as their cleaner presentation helps reduce visual overload. For long-term analysis spanning months or years, bar charts excel because the psychological component becomes less important than the overall structure.

3. Heikin-Ashi Charts

Heikin-Ashi, meaning "average bar" in Japanese, is a modified candlestick technique that uses averaged price data to filter out market noise and better identify trends.

Construction

Heikin-Ashi candles are calculated using modified formulas rather than simple open, high, low, and close prices. The open of each Heikin-Ashi candle is the average of the previous HA candle's open and close. The close is the average of the current period's open, high, low, and close. The high is the highest value among the current period's high, HA open, or HA close, while the low is the lowest value among these same components:

• HA Close = (Open + High + Low + Close) / 4
• HA Open = (Previous HA Open + Previous HA Close) / 2
• HA High = Maximum of (High, HA Open, HA Close)
• HA Low = Minimum of (Low, HA Open, HA Close)

This averaging formula creates smoother-looking candles that highlight the trend direction more clearly.

Illustration 3:

Heikin-Ashi charts make trends visually obvious with longer sequences of similarly colored candles. They effectively filter out minor price fluctuations that might distract from the main trend, making it easier to identify trend continuation and potential reversals. The averaging effect reduces the likelihood of acting on market noise, resulting in fewer false signals.

4. Renko Charts

Renko charts, from the Japanese word "renga" meaning brick, focus exclusively on price changes of a predetermined amount, completely ignoring the time element of trading.

Construction

Renko charts are constructed using "bricks" of a fixed price size (e.g., 10 pips*, $0.50, etc.). 

What is a Pip?

A pip stands for “percentage in point” and is the smallest price movement in most currency pairs.

In forex trading, it’s how we measure changes in value between two currencies. For most major currency pairs, 1 pip = 0.0001. So, if EUR/USD moves from 1.1050 to 1.1051, that’s a 1 pip move.

For currency pairs involving the Japanese yen, like USD/JPY, 1 pip equals 0.01 instead — because the yen is worth less, so prices use fewer decimal places.

A new brick is drawn only when the price moves by at least the brick size in either direction. Upward price movements create white/green bricks, while downward movements create black/red bricks. Time is not a factor in Renko charts—periods with little price movement may show no new bricks, while volatile periods may show many.

Illustration 4: 

Renko charts show exceptionally clear trends by eliminating minor price movements entirely. They completely remove price movements smaller than the brick size, reducing false signals and "noise" that might confuse trading decisions. They clearly highlight key levels where price repeatedly reverses and make trend direction immediately obvious.

A trader following crude oil prices with a Renko chart using $1 bricks would see a clean stair-step pattern during trends, without being distracted by smaller price fluctuations. 

However, Renko charts completely distort the time scale—one brick might represent minutes during volatile periods or days during quiet periods. This can make it difficult to compare Renko charts with time-based analysis or indicators.

Key Differences Summarized

Key Takeaways

• Each chart type offers a unique perspective on market behavior, with specific advantages and limitations
• Candlestick charts provide rich information about market psychology and short-term sentiment shifts
• Bar charts offer similar information to candlesticks with a cleaner visual presentation
• Heikin-Ashi charts filter market noise through price averaging, making trends more obvious
• Renko charts eliminate time and minor price movements, focusing exclusively on significant price changes
• Most traders benefit from familiarity with multiple chart types, using each for its specific strengths
• The ideal chart type depends on your trading style, timeframe, and the specific market conditions

Next Steps

After mastering various chart types, you'll be ready to explore how markets move in terms of trends and trading ranges. The next lesson will cover trend identification, trend phases, range-bound markets, and how to adapt your trading approach to different market conditions.