What Is a Line Chart?
A line chart is a graphical representation of an asset's historical price action that connects a series of data points with a continuous line. This is the most basic type of chart used in finance, and it typically only depicts a security's closing prices over time. Line charts can be used for any timeframe, but they most often make use of day-to-day price changes.
- A line chart is a type of chart that displays information as a series of data points connected by straight line segments.
- A line chart is a way of visually representing an asset's price history using a single, continuous line.
- A line chart is easy to understand and simple in form, typically only depicting only changes in an asset's closing price over time.
- Because line charts usually only show closing prices, they reduce noise from less critical times in the trading day, such as the open, high, and low prices.
- Because of its simplicity, however, traders looking to identify patterns or trends may opt for chart types with more information, such as a candlestick.
Understanding Line Charts
A line chart gives traders a clear visualization of where the price of a security has traveled over a given time period. Because line charts usually only show closing prices, they reduce noise from less critical times in the trading day, such as the open, high, and low prices. Line charts are popular with investors and traders because closing prices are a very commonly viewed piece of data related to a security.
Advantages and Disadvantages of Using Line Charts
Traders can be overwhelmed with too much information when analyzing a security’s chart. The trading term “paralysis by analysis” is used to describe this phenomenon. Using charts that show a plethora of price information and indicators can give multiple signals that lead to confusion and complicate trading decisions.
However, using a line chart helps traders clearly identify key support and resistance levels, trends, and recognizable chart patterns. For example, the line chart below makes it easy to locate major support and resistance levels between $2.10 and $2.70 before the price drops below support.
Line charts are also ideal for beginner traders to use due to their simplicity. They help to teach basic chart reading skills before learning more advanced techniques, such as reading Japanese candlestick patterns or learning the basics of point and figure charts. Volume and moving averages can easily be applied to a line chart as traders continue their learning journey.
On the other hand, line charts may not provide enough price information for some traders to monitor their trading strategies. Some strategies require prices derived from the open, high, and low. For example, a trader may buy a stock if it closes above the high price of the previous 20 days.
Also, traders who use more information than just the close do not have enough information to back-test their trading strategy by using a simple line chart. Candlestick charts, which contain an asset's daily open, close, high, and low prices all in the same unit may be more useful in these cases.
Line charts can be constructed manually by hand, or by using software, such as Microsoft Excel or Google Sheets, which greatly improves the speed and accuracy of the end product.
Line Chart FAQs
What Is a Line Chart Used for?
A line chart is a type of chart used to show information that changes over time. Line charts are created by plotting a series of several points and connecting them with a straight line. Line charts are used to track changes over short and long periods of time.
What Is an Example of a Line Chart?
A line chart is used to show the change of information over a period of time. The horizontal axis is usually a time scale; for example, minutes, hours, days, months, or years. For example, you could create a line chart that shows the daily earnings of a store for five days. The horizontal axis would include the days of the week, while the vertical axis would have the daily earnings.
What Are the Types of Line Charts?
In statistics, there are three main types of line charts: a simple line chart, multiple line chart, and a compound line chart.
A simple line chart is plotted with only a single line. A simple line chart shows the relationship between two different variables; for example, the day of the week and the closing price of a security. A multiple line chart is a line chart that is plotted with two or more lines. It is used to depict two or more variables that change over the same period of time. A compound line chart is used when information can be subdivided into different types. A compound line chart expands upon the simple line chart; it shows the total data set, plus the different types of data that make up the set.
What Is a Stacked Line Chart?
A stacked line chart is used to compare trends over time. It is constructed with two or more sets of data; the different data sets are typically given corresponding colored lines. In a stacked line chart, the data values are added together.
How Do I Make a Line Chart in Excel?
You can use a line chart in Excel to display trends over time. In Excel, line charts are appropriate if you have text labels, dates, or a few numeric labels on the horizontal axis (x-axis).
Here are the steps to create a line graph in Excel. (If you are using numeric labels, empty cell A1 before you create the line chart):
- After inputting in your values, select the range (whatever range encompassing those values). For example, A1:D7.
- On the Insert tab, in the Charts group, click the Line symbol ("Insert line chart")
- Click "Line with Markers"