I Walk the Line

A quick trawl through Google results in plenty of articles comparing the different chart types available for trading. Most of them start off by giving a comparison between the three main types i.e. Bar charts (sometimes called Western Bar Charts), Japanese Candlesticks and Line graphs (Renko charts still being considered a tad too esoteric to even consider) with many ending by stating that the Japanese candle is the one favoured by most traders. Can´t argue with that as Candle charts are seen just about everywhere. Nearly every chart analyst uses them as do the vast majority of traders on Twitter and brokers looking to sell their wares. Candles have just about cleaned up when it comes to charting it seems. But are we right to always default to conventional wisdom?

I admit when I first started trading I was no different to anyone else and fell in line and used the ubiquitous candle charts. I got to know them in detail as you must, devoured every nuance of OHLC and became proficient (I assumed) at reading what was there to be read in the tale of the wicks and bodies of my red and green tapers. I did take a quick look at Bar charts but just couldn´t get used to them as the info I thought I needed just didn´t hit me in the face as it did with candles, and when I looked at line charts it was only out of curiosity. I had already been indoctrinated by the cult of the candle. And so I stuck doggedly to my go to candles. However, over time as my trading style began to evolve I started to question whether my charts were giving me what I wanted in the most efficient and effective manner. I had this nagging feeling that while I could see the bigger picture, I was not clearly seeing the trees in the wood in order for me to be able to trade in the way I wanted to. That´s when I decided to take another look at lines. I´ve never looked back since.

Because I am a visual thinker I like my data to be presented in a way that jumps out at me from the page in a clearly visible and understandable fashion and line charts give me that. Take a look at the picture below.

On the left is a traditional candle chart and on the right is a line chart. While the candles give a straightforward read of the trends and flow of the price action, I find it difficult to see what is happening at the key points of the chart where I might want to trade. For example its much easier to see the levels of support and resistance on the line chart as the wicks tend to blur the levels on the candle chart. Similarly, patterns jump out at me on the line chart where I would have to look much more closely on the candle chart to spot them. Its not that I cant see them its that they are clearer to me using the line chart. Obviously the line chart, which notes only the closing price of each time period misses the nuance wicks provide (stop runs for example) and in this case does not illustrate the gap that occurred. But for the way I trade it gives me a far clearer read of the key things I look for. It was seeing two charts like this side by side and appreciating the comparison that made me change the way I now look at charts.

After a using just line charts to trade from for a period of time I began to finesse exactly what I needed and realized that I did want to see the candles but I didn't want to lose the lines. So I eventually ended up with a candle chart with the candles ´greyed out´ in the background and with a 1 period SMA overlaid which gives me the best of both worlds. The picture below shows what I ended up with. The levels, patterns and price action I look for to enter and exit trades is there in all its clarity - well for me at least.

In summary then, while candles have their obvious importance I feel line charts are greatly under utilized in terms of presenting a much clearer picture of what is happening at the chart face. Of course its down to personal style and what works best for you as an individual trader but for me challenging the conventional wisdom of charting was definitely the right thing to do. I now walk the line and could never go back to just using candles although I still like to see them flicker in the background.

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