Three Unique Chart Types to give you a different perspective of the Markets
For many traders who base their trading decisions from the technical analysis or chart patterns, the candlestick charts are one of the most widely used chart types. Of course, there is also the bar chart and the line charts which are also used every now and then and let's not forget the Heikin Ashi candlestick charts often used in conjunction with trends.
While the above four chart types are the most common, there are also some unconventional charts that are less popular but they give some unique perspectives of the markets. Most mistake some other chart types beyond the usual charts as being something new, but as a matter of fact, some of these unique chart types are just as old as the Candlestick charts.
But before we go into the details of the unconventional chart types, let’s first revisit how the regular charts are built.
Whether you are using the candlestick, OHLC bar chart, the line chart or even the Heikin Ashi chart, there are two important elements on your chart; price and time. Price is plotted on the Y-axis and time is plotted on the x-axis.
A regular candlestick chart plotted on x-axis (time) and y-axis (price)
No matter what other chart type you use, the same convention is followed. Of course, visually the OHLC bar chart will look different while the line chart simply plots just the closing prices over time. Still, all the four chart types follow the same format of price and time.
But what happens when time is removed from the equation and focus is given only to price? After all, when it comes to trading, we make use of price which is the most important factor, with time coming in as a secondary element. Thus, when time is eliminated from the equation, what we get is a chart type that focuses purely on price and nothing else.
There are quite a few different chart types that are time independent, but the three most commonly used time-independent chart types are:
- Range bar chart
- Renko box chart
- Point and Figure chart
1. The Range Bar Charts
Range bar charts are admittedly new compared to candlestick charts. This chart type was developed in the mid 1990's by a Brazilian trader named Vincente Nicolellis. Nicolellis was primarily trading the Brazilian stock exchange which was known for its volatility. Unable to find a good trading system using the conventional chart types, Nicolellis began work on designing a custom chart type. His work eventually gave birth to the range bars.
As the name suggests, Range bars focus on price alone and do not account for time. The basic principle behind range bars was that price movement was paramount to volatility and not time. Thus, Nicolellis removed time from the equation.
How to construct range bars?
In a range bar, each bar represents a specified movement in price. There are three rules that govern range bars, which are:
- A range bar must have a high and low which equals the range specified
- A new range bar must open outside of the high or the low from the previous range bar
- A range bar will close at a high or a low
In other words, in a range bar you only have high and low and not open or close. Instead of time being the determining factor, a new range bar is opened when price moves “x” number of pips from the previous high or low price.
Example Range bar chart
A range bar chart is ideal for trading range breakouts. Because time is not a factor here, the range bar charts are pure price action based charts.
2. Renko Charts
Renko chart finds its origins in Japan, similar to candlestick charts and Heikin Ashi charts. The name Renko comes from the Japanese word Renga which means bricks. The Renko chart is a time independent chart and is visually distinctive due to the bricks that are plotted.
When using Renko charts, a bullish Renko brick is formed when price moves “x” number of pips that you define in the setting. A reversal Renko brick is formed when price moves twice the distance in the opposite direction.
Constructing a Renko Chart
To construct a Renko chart, the first step is to define the number of pips. For the forex markets, you can start with something like 5 pips or even 20 pips, depending on your preference. A Renko brick is plotted when price moves 5 pips higher and then a new Renko brick is formed. This continues until there is a reversal. Because Renko reversal bricks are two times the regular brick size, a 10 pip bearish move is required for a new bearish Renko brick to be plotted.
Example Renko Chart
3. Point and Figure Chart
The Point and Figure chart, or P&F for short is an age old technique used by technical analysts. The P&F charts are time independent and are in fact closely related to the Renko charts. However, the P&F looks visually different with the X and O's that are plotted. An X typically represents rising price while the O represents falling prices. P&F charts were first represented using numbers which later evolved into the current day’s X’s and O’s.
A major distinction between other time-independent chart types and the P&F chart is that the P&F charts are best used with chart patterns including horizontal support and resistance levels and trend lines. Technical indicators are not generally used on P&F charts.
Constructing a Point and Figure Chart
A P&F chart is formed based on the price movement with the X's and O's plotted in a column with each column representing an uptrend (when it is an X) and a downtrend (when it is an O). Besides the box size, P&F chart also have a reversal amount. This value determines the amount that a stock needs to move in the opposite direction for the trend to change (or in other words, a new column to be plotted).
Example of a Point and Figure Chart
What chart type is best?
A common question that comes to mind is which from these time-independent charts is the best to use. The answer for this is subjective and depends on a trader’s preference. Bear in mind that the effectiveness in using a chart type will depend on a number of factors and as a trader, you should first try out the different chart types before determining which of the three is more ideally suited for you to trade with.
Traders can also combine their regular analysis on the more common chart types and compare their findings with one of the time independent chart types to get an idea of the markets.