The price chart is the most essential tool for any binary options trader. Over the next few years and months, the price chart will become your best friend and your worst enemy at the same time. To most newcomers in binary options a price chart is simply a wobbly line in a diagram with some written prices next to it.
To an experienced trader, however, a price chart is an open book that tells him everything he needs to know about the market. It allows him to predict whether the assets price will rise or fall, and whether it is a good investment opportunity or not.
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On the most basic level, a price chart is a diagram that shows the price of an asset on one axis and a period of time on the other. There are, however, very different ways to draw the price into the chart.
The most important chart types are:
1) Line chart
The line chart is the most commonly used chart type you see on TV and the web. These charts use a simple line to draw the past price movements of the asset into the chart.
Trading experts, however, know better methods to visualize price movements. These methods allow them to draw far more important information from the chart than a line chart would allow.
2) Bar chart
For quite some time the bar chart was the most commonly used chart type of professional traders. In a bar chart, the price is not drawn into the chart in a line, but in many individual bars. Each bar summarizes all market movements of a certain time span.
Many regular traders use daily charts. This means one single bar of the bar chart represents an entire trading day. Other common time frames are hourly, 15 minutes, or 30 seconds.
Each bar in a bar chart is characterized by a long vertical line and a shorter horizontal line to each site. The long vertical line represents the market’s full trading range during the period. The upper end of the line marks the market’s high in this period, the lower end of the line marks the market’s low.
The shorter line to the left marks the period’s opening price; the line to the right marks the period’s closing price. If the opening line is lower than the closing line, the period featured rising prices. If the opening line is higher than the closing line, the period featured falling prices.
This method of displaying market movements reduces the displayed information, thereby allowing a trader to quickly access those factors most important to him.
Originally the Japanese version of bar charts, candlesticks have found many fans all over the world. While candlesticks measure the same four prices as bar charts, they display them differently. The distance from open to close is measured by a thick line, called the body. At both ends the body is extended by two thin lines, the wicks. The upper wick represents the period’s high, the lower wick the period’s low.
The color of the body differs depending on whether the period featured rising or falling prices. While the exact colors are different for each chart provider and can be chosen individually with most charting software, the optical classification in rising and falling periods is one of the big advantages of candlesticks. Even in a sideways movement, a trader can quickly recognize what prices are doing.
With bar charts on the other hand, sideways movement can take quite some time to figure out, as every single bar has to be analyzed individually. With candlesticks, you recognize immediately which periods fell and which ones raised.
The second big advantage of candlesticks is candlestick formations. These sometimes simple and sometimes complex formations allow a trader to make sophisticated projections about future price movements within mere seconds.
Therefore, knowing candlestick formations and using candlesticks for your price charts can greatly help your trading and your success.