OHLC Chart

Backtesting

What is an OHLC graph?

An OHLC chart is a type of bar chart that shows open, high, low and closing prices for each period. OHLC charts are useful because they show the four main data points over a period, the closing price being considered the most important by many traders.

The type of graph is useful because it can show increasing or decreasing dynamics. When the opening and closing are distant from each other, this shows a strong dynamic, and when the opening and closing are close together, it shows an indecision or a weak dynamic. The top and bottom show the full price range for the period, useful for assessing volatility. There are several patterns that traders watch for on OHLC charts.

Understanding OHLC graphics

OHLC graphics consist of a vertical line and two short horizontal lines extending to the left and right of the horizontal line. The horizontal line extending to the left represents the opening price for the period, while the horizontal line extending to the right represents the closing price for the period. The height of the vertical line represents the intraday range for the period, the top being the top of the period and the bottom of the vertical line being the bottom of the period. The entire structure is called a price bar.

When the price increases over a period, the straight line will be above the left, because the fence is above the opening. Often these bars are colored black. If the price drops during a period, the straight line will be below the left, because the fence is below the opening. These bars are generally red in color.

OHLC charts can be applied at any time. If applied to a 5 minute chart, it will display the open, high, low and closed price for each 5 minute period. If applied to a daily chart, it will display the open, high, low and closed price for each day.

OHLC charts display more information than line charts, which only show closing prices connected together in a solid line. OHLC and candlestick charts show the same amount of information, but they show it in a slightly different way. While OHLC graphics show opening and closing via horizontal lines facing left and right, candlesticks show opening and closing via a real body.

Key points to remember

  • An OHLC graph shows the open, high, low and closed price for a given period.
  • It can be applied at any time.
  • The vertical line represents the top and bottom of the period, while the left line marks the opening price and the right line the closing price. This entire structure is called a bar.
  • When the closure is above the opening, the bar is often colored black. When the closure is below the opening, the bar is often colored red.

Interpretation of OHLC graphics

Technical analysts use several different techniques to interpret OHLC charts. Here are several guidelines.

Vertical height: The vertical height of an OHLC bar indicates volatility over the period. If the height of the line is large, traders know that there is a lot of volatility and indecision in the market.

Position of the horizontal line: The position of the left and right horizontal lines indicates to technical traders where the asset has opened and closed relative to its highest and lowest. If the stock rallied higher, but the close was much lower than the highest, traders might assume that the rally collapsed towards the end of the period. If the price fell, but closed well above its lowest point, sales failed towards the end of the period.

If the opening and closing are close, it shows indecision, because the price could not have made much progress in both directions. If the closing is well above or below the opening, it shows that there were strong sales or purchases during the period.

Bar color: Generally, during an uptrend, more bars will be colored black than red. During a downward trend, more red bars than black bars are common. This can provide information about the direction of the trend and its strength. A series of large black bars, at a glance, shows a strong upward movement. Although further analysis is required, this information can be useful in deciding to go into more detail.

reasons: Traders also watch for patterns that occur on the OHLC chart. The main models include reverse keys, the inner bar and the outer bar. A key reversal in an uptrend occurs when the price opens above the close of the previous bar, sets a new high, then closes below the lowest of the previous bar. It shows a strong change in momentum which could indicate that a withdrawal is starting. A key reversal in a downtrend occurs when the price opens below the close of the previous bar, makes a new low, and then closes above the top of the previous bar. This indicates a strong upward change, announcing rally potential.

Example of OHLC graph

The following is an OHLC graph for the S&P 500 SPDR ETF (SPY). Overall increases are generally marked by more black bars, such as the period in early October. In mid-November, the price moves slightly higher but especially laterally, marked by more alternate bar colors.

StockCharts.com

In mid-November, the price started to rise, marked by a few wider black bars. At the start of the year, the price continued to climb, dominated by black risers. In early February, there are large red bars, much larger than those seen in the previous advance. This is a major warning sign of strong sales pressure.

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