Binary option traders must become proficient in reading price charts to achieve success. Charts for all underlying assets—stocks, commodities, indices, and currency pairs—are available through various binary option brokers online. There are several different types of charts from which traders can choose, all of which have unique strengths and weaknesses.
Time vs. Price
Most charts plot the price of an asset versus time. These charts can take the form of histograms, bar charts, line charts, dot charts, and candlestick charts. There are, in reality, an almost infinite variety of chart types out there, but the aforementioned are the most commonly encountered.
In a time vs. price chart, a trader must choose a time interval that he wants to use as the basic unit of the chart. For instance, in a 5-minute candlestick chart, each candlestick represents the price data for all trading that occurred during one 5-minute interval. In a weekly candlestick chart, each candlestick represents all the trading that occurred during a one-week interval. The time interval a trader chooses will depend largely on his trading or investing goals. If he is a short-term trader, such as a day- or swing-trader, he is likely to use charts with 60-minute and lesser intervals. Long-term investors, on the other hand, tend to use charts with daily, weekly, or even monthly intervals.
Each time interval on a price chart has four main characteristics: the ‘open’ is the price at which a time interval starts; the ‘high’ is the highest price that occurs during that interval; the ‘low’ is the lowest price that occurs during an interval; and the ‘close’ is the price at the end of a time interval. Together these characteristics are commonly referred to as high-low-open-close, or HLOC. Often, traders choose chart types based on how the charts display HLOCs. Dot and line charts, for instance, usually display only one of the four prices for each time interval, while bar and candlestick charts typically display all four.
Volume vs. Price
Some traders choose intervals for their charts that are based not on time, but on volume. For instance, a candlestick chart that is volume-based does not start a new candle after a certain amount of time has passed, but after a certain volume of contracts or shares has been traded. Volume-based charts are more commonly used by futures traders. There, the markets trade 24 hours per day, often with very low volume at night. Using volume-based charts enables these traders to condense the overnight trading into just a few bars or candles so that the low-activity trading hours are not over-represented on their charts.