An OHLC chart is a type of financial chart used to represent price movements of an asset over a specific period. The acronym OHLC stands for Open, High, Low, and Close, which are the four key data points shown for each time period on the chart. OHLC charts are widely used in technical analysis to track the price action of currency pairs, stocks, commodities, and other assets, providing a comprehensive view of price movements.

In this article, we’ll dive into the structure of an OHLC chart, how to read it, and how traders use it to make informed decisions.

Understanding the Structure of an OHLC Chart

Each vertical bar on an OHLC chart represents the price movement of an asset over a set time period. The key components of an OHLC chart are:

1. Open Price

The open price is the price at which the asset started trading at the beginning of the time period. For example, if you are looking at an hourly chart, the open price would be the price at the start of that hour. This is usually marked as the bottom of the vertical line or as the first price point on the left side of the bar.

2. High Price

The high price represents the highest price the asset reached during the specified time period. It is the top point of the vertical line in the OHLC bar. This shows the peak of the price movement during that period.

3. Low Price

The low price is the lowest point the asset reached during the time period. It is the bottom point of the vertical line and shows the lowest price at which the asset traded during that period.

4. Close Price

The close price is the last price at which the asset traded during the time period. This is typically marked as the top of the vertical line if the close is higher than the open, or the bottom of the vertical line if the close is lower than the open. It is the most important price for many traders because it reflects the final market consensus for that period.

The OHLC Bar

• The OHLC chart is made up of vertical bars, with the top and bottom representing the high and low prices for that period.
• The horizontal lines at the sides of the bar represent the open and close prices. The difference between the open and close forms the body of the bar, while the high and low prices create the wicks (also known as the “shadows”) extending above and below the bar.

How to Read an OHLC Chart

Reading an OHLC chart involves analyzing the four key prices (open, high, low, and close) to understand the market’s movement during a given time period.

• Bullish Candlestick: If the close price is higher than the open price, the bar is typically drawn with a filled body (in some charts, a green or white colour is used). This suggests that the market has moved upwards during the time period.
• Bearish Candlestick: If the open price is higher than the close price, the bar will be shown as a hollow or filled with a dark colour (often red or black). This suggests that the market has moved downwards during the time period.
• Wicks (Shadows): The wicks show the price movement beyond the opening and closing prices. Long wicks indicate that there was significant price volatility during that period, while short wicks suggest a more stable price movement.

Example:

Let’s say you are looking at a 1-hour OHLC chart for EUR/USD:

• The open price at the beginning of the hour is 1.2000.
• The high price during the hour is 1.2050.
• The low price during the hour is 1.1980.
• The close price at the end of the hour is 1.2020.

The vertical bar would stretch from 1.1980 to 1.2050, with the open at 1.2000 and the close at 1.2020.

How Traders Use OHLC Charts

OHLC charts are highly effective for traders who rely on price action and technical analysis to make decisions. Here’s how they can be used:

1. Identify Market Sentiment

• If the body of the OHLC bar is long, it indicates strong momentum in the market (bullish or bearish).
• Short bodies suggest that the market is consolidating or indecisive, and the price is moving within a narrow range.

2. Spotting Trends

By analyzing the open, high, low, and close prices, traders can identify trends:

• Uptrend: If the price is consistently making higher highs (highs move upwards) and higher lows, the asset is in an uptrend.
• Downtrend: If the price is consistently making lower highs and lower lows, the asset is in a downtrend.
• Sideways/Range-bound Market: When the prices oscillate between specific levels of support and resistance, a sideways or range-bound market is formed.

3. Reversal and Continuation Patterns

OHLC charts are often used to identify common reversal and continuation patterns, such as:

• Engulfing Patterns: A bullish or bearish engulfing pattern occurs when a smaller bar is followed by a larger bar that completely engulfs it, signaling a potential trend reversal.
• Doji: A Doji is a candlestick with a small body and long wicks, suggesting indecision and potential for a reversal.
• Hammer: A hammer pattern has a small body at the top of the range and a long lower wick, often signaling a reversal to the upside after a downtrend.

4. Use with Other Indicators

OHLC charts can be combined with other technical indicators such as moving averages, RSI, MACD, or Fibonacci retracements to validate trade setups and increase the likelihood of success. For example, a bullish engulfing pattern on an OHLC chart at a key support level may be confirmed by the RSI indicating oversold conditions, providing a more reliable buy signal.

Practical and Actionable Advice

• Practice in Demo Accounts: If you’re new to reading OHLC charts, practice spotting trends, patterns, and key levels using a demo account before trading with real money.
• Combine with Other Tools: Combine OHLC chart analysis with other tools like support and resistance levels, moving averages, or indicators to improve your trading decisions.
• Focus on Close Prices: The close price often holds more significance than the open price for determining market sentiment, so give it more attention when making decisions.

FAQs

What is the difference between an OHLC chart and a candlestick chart?

Both charts show the open, high, low, and close prices, but a candlestick chart is visually more appealing and easier to interpret due to its body and wick structure. An OHLC chart uses vertical bars to represent the data.

Why is the close price important on an OHLC chart?

The close price is often considered the most important price on an OHLC chart because it represents the final market consensus for that period. Traders often use it to determine if the market is bullish or bearish.

Can OHLC charts be used for long-term analysis?

Yes, OHLC charts can be used for both short-term and long-term analysis. The timeframes of the bars can be adjusted to suit different trading strategies, such as intraday trading or long-term investing.

What does a long wick on an OHLC bar indicate?

A long wick indicates that the price moved significantly during the period, but eventually retraced to a point near the open or close. This can indicate market volatility or rejection of a particular price level.

How can I combine OHLC charts with technical indicators?

You can use indicators like RSI or MACD to confirm signals generated by OHLC chart patterns. For example, a bullish reversal pattern on an OHLC chart combined with an oversold RSI might indicate a strong buying opportunity.

Conclusion

An OHLC chart is a powerful tool for forex traders and technical analysts. By understanding the components of the OHLC chart—open, high, low, and close prices—traders can analyze price movements, identify trends, and spot potential reversals or continuations. Combining OHLC charts with other technical analysis tools can help you make more informed trading decisions and improve your overall trading strategy.