If you ask a group of 10 e-mini traders which type of bar they prefer on their trading charts you will find no shortage of strong opinions. Most traders were taught to trade on a specific type of bar, say a candlestick, and adjust to their trading to the art of reading candlestick charts. Generally speaking, once they have learned a specific system it is difficult to dislodge, especially if the e-mini trader has been having success with candlesticks. On the other hand, there are a wide variety of bar charting techniques worthy of consideration, and most people fail to do so.
In this short article we will look at five types of bar charting techniques and give a short analysis of the advantages and disadvantages of each technique. We will be looking at:
• Candlestick charts
• Standard bar charts
• Heiken-Ashi charts
• Renko charts
• Range charts
It is my observation that the most popular charts and use today are candlestick charts. For the sake of convenience, we will be talking about bar charting techniques in relation to e-mini trading; though there are a wide variety of trading disciplines that employ the charting techniques we will discuss.
Candlestick charts
It is assumed by most historians that candlestick charts were developed in the 1500’s in Japan. Japan is considered by many to be the first country to develop a futures market of sorts in the rice trading industry. A candlestick is several components in its composition; a body, upper and lower wicks (though if the price closes at the top or bottom of a candlestick, it will not have a shadow at that point). It is also common to hear the wick formation referred to as a shadow. The body portion of a candlestick chart was traditionally painted black or white indicating the direction the body had moved. On most current charts, you will generally see upward movements in the body painted green and downward movements in the body painted red. There are groups of traders who have used traditional Japanese patterns in candlestick formations to predict movement in the market. The empirical evidence on accuracy of the predictive nature of candlesticks points toward a negative correlation and accuracy, though I would admit that a conclusive decision on this topic is yet to be formalized.
Heiken-Ashi Candlesticks
The Heiken-Ashi version of candlesticks also has its origins in the 1500’s in the Japan rice markets. They differ significantly from traditional candlesticks in that they are weighted in nature and are trend oriented. I have used them with success in my trading, though certain market conditions must exist for them to be used successfully. The formula for calculating Heiken-Ashi bars is as follows:
• Open = (open of previous bar+close of previous bar)/2
• Close = (open+high+low+close)/4
• High = maximum of high, open, or close (whichever is highest)
• Low = minimum of low, open, or close (whichever is lowest)
As you can notice there is a heavy weighting on the latter portion of the bar and the system is especially effective in trend following systems. There are a set of specific guidelines for using Heiken-Ashi charting bars which is reasonably extensive and beyond the scope of this article. However, I recommend any trader investigate this charting system as it has many useful applications.
Standard Bar Charts
While I no longer trade this charting system, when I learned the trade it was the predominant system in use. There are many traders at present who still prefer standard bar charts, especially stock traders, for their charting needs. Standard bar charts are reasonably simple in their construction; there is a vertical line that shows the range of the traders chosen bar time. And a hash mark on the left side of the line to indicate the open, and a hash mark on the right side to indicate the close of that particular bar. This charting system is often referred to as an OHLC chart. While this may be the simplest of charting systems, it’s still important to note that all charting systems are essentially displaying the same data in different formats.
Renko and Range charts
These two charting systems are similar in many ways, though they have some very distinct dissimilarities that should be thoroughly understood before undertaking any serious trading with them. Like candlesticks and Heiken-Ashi charting, Renko bars also have their origin in Japanese trading. Quite literally, Renko means bricks. Renko bars are often referred to as bricks by e-mini traders. When using these bars you set a specific range to be charted. For example, you may set your Range and Renko bars to a setting of four. With a setting of 4, every time the market moves 4 ticks a bar is formed. But there is a fundamental difference between Renko and Range bars. Range bars chart market movement in either direction, while Renko bars chart only in one direction. For example, when using Renko bars the market would have to move 4 ticks upward or downward before a new brick is displayed. On the other hand, a range bar will chart the complete range, up or down, and form a bar indicative of this movement.
In summary, we have taken a close look at 5 different charting tools. While an in-depth discussion of the advantages and disadvantages of each system would entail a very lengthy discussion, I have tried to point out some basic advantages and disadvantages of each system. Each type of bar charting system provides a definite purpose for the e-mini trader, and I recommend serious e-mini traders investigate the advantages and disadvantages of each of these charting systems.
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