How to Read a Bar Chart for Day Trading
Bar charts are one of the most popular trading chart types, because they provide a lot of information (that a person can use to make trading decisions) and are relative easy to read and interpret.
Bar charts consist of an opening foot (facing left), a vertical line and a closing foot (facing right). Each bar includes the open, high, low and close price (explained below) that occurred during a specific interval. This interval is set by the trader. For example, if a day trader opts to view a 1-minute bar chart, then a new bar will form every minute, and each bar will show the open, high, low and close price for each minute. The interval can also be something other than time, such a specific number of transactions (called tick charts).
When a certain number of transactions have occurred, then a new bar will form. In this way, you can have a timed bar chart, or a tick bar chart.
Bar charts also show the direction (upward or downward) the price moved, as well as how far the price moved during the bar. Traders can then assess how the price is moving based on the bar chart; if they make trading decisions based on those price bars, they are called price action traders.
How to Read a Bar Chart
Bar charts are often called OHLC Bar charts, as well as HLC Bar charts. The former is more popular and includes information on the open (O), high (H), low (L) and close (C) price. Whereas the HLC chart just includes information on the high, low and close.
Here is how to read a bar chart, and what each part of the bar mean. See the attached image for an example of a bar chart.
- Open - The open is the first price traded during the bar, and is indicated by the horizontal foot on the left side of the bar.
- High - The high is the highest price traded during the bar and is indicated by the top of the vertical bar.
- Low - The low is the lowest price traded during the bar, and is indicated by the bottom of the vertical bar.
- Close - The close is the last price traded during the bar and is indicated by the horizontal foot on the right side of the bar.
- Direction - The direction the price has moved during the bar is indicated by the locations of the opening and closing feet. If the closing foot is above the opening foot then the price made upward progress during the bar. If the closing foot is below the opening foot then the price made downward progress during the bar. In the example chart, the upward bars are colored green and the downward bars are colored red.
- Range - The range of the bar is indicated by the locations of the top and bottom of the vertical bar. The range is calculated by subtracting the low from the high (Range of Bar = High - Low).
Final Word on Reading a Bar Chart
It takes a bit of practice to get used to reading a bar chart, especially when the price is moving very quickly. Remember the open is always on the left, and close always on the right (like how you read: right to left, because the open always comes before the close). The vertical part of the bar represents how high and low the price went during the interval of the bar.
A bar chart also typically includes volume (how many shares, forex lots or futures contracts are changing hands on each bar), therefore, it is also recommended you understand buying and selling volume when reading a bar chart.