An OHLC chart is a type of bar chart that shows open, high, low, and closing prices for each period. OHLC charts are highly valued by traders because they reveal the four major data points over a time interval, with the closing price often deemed the most pivotal. This chart format is beneficial as it illustrates the momentum behind market movements and enables volatility assessment.
Key Insights
- An OHLC chart displays the open, high, low, and close prices for a selected period.
- Suitable for any time frame, these charts provide valuable insight into both short and long-term market trends.
- The vertical line indicates the high and low for the period, a leftward tick marks the opening price, and a rightward tick shows the closing price—collectively forming what’s known as a price bar.
- Typically, a bar is colored black if the close is above the open and red if the close is below the open.
Decoding OHLC Charts
OHLC charts consist primarily of a vertical line and two horizontal lines extending to the left (open price) and right (close price) of the vertical. The vertical span reveals the range between the high and low prices for the chosen period. Notably, when the closing price surpasses the opening price, the rightward tick is above the leftward tick, and such bars are often colored black or green. Conversely, red bars signify that the closing price falls below the opening. This chart type offers a more detailed illustration than line charts, comparing similarly detailed candlestick charts, yet through distinct visual formats.
Interpreting OHLC Data
Several interpretative techniques help analysts decode OHLC charts:
Vertical Height
The vertical height of a price bar signifies the period’s market volatility. A taller bar implies high volatility and market indecision.
Horizontal Line Position
The head-to-toe positioning of horizontal lines reflects the asset’s opening and closing relative to its high and low for the period. Large gaps between closing and high, or opening and low, indicate potential rally or sell-off culmination.
Bar Color
Recurring uptrends are marked by a preponderance of black bars contrary to downtrends symbolized by red bars. Thus, observing the sudden appearance of multiple large black bars can hint at strong upward momentum worth additional analysis.
Recognizing Patterns
Spotting key patterns provides insights into market shifts:
- Key Reversal: Inuptrend, a price opening above the prior bar’s close, peaking at a new high yet closing below the prior bar’s low confirms momentum shift, suggesting likely pullback. The inverse applies to a downtrend, indicating potential rally onset.
- Inside Bar: Illustrates market consolidation, with the entire bar within prior bar’s range, often preceding notable breakouts.
- Outside Bar: Indicates significant oscillation with highs and lows exceeding previous bar’s range, hinting at strong forthcoming market moves.
Practical OHLC Chart Example
Below is a practical OHLC chart for the S&P 500 SPDR ETF (SPY). Notable market dynamics are marked by bar colors and height variations. For instance, in early October, predominant black bars reveal an overall uptick. Throughout mid-November, an interchange of bar colors suggests slight upward movement and stabilization.
In mid-November, wider black bars correspond to escalating prices. Entering the new year, predominantly black rising bars confirm the rally, but significant red bars beginning February warn strong selling pressure.
By adeptly understanding and interpreting OHLC charts, traders can decode market signals to make intelligent, profitable decisions.
Related Terms: candlestick charts, line charts, trading patterns, volatility, market momentum.
References
- Mark Andrew Lim. “The Handbook of Technical Analysis,” Pages 67-72. John Wiley & Sons, 2015.
- The John A. Dutton Institute for Teaching and Learning Excellence, The Pennsylvania State University. “EBF 301: Global Finance for the Earth, Energy, and Materials Industries: Lesson 9 - Technical Analysis, Charting Methods”.
- University of Nebraska–Lincoln, Institute of Agriculture and Natural Resources, CropWatch. “Charting Commodities: Bar Chart vs Candlestick Chart”.
