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 typically only depicts a security's closing prices over time. Line charts can be used on any timeframe, but most often using day-to-day price changes.
- 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, depicting only changes in an asset's closing price over time.
- Because of its simplicity, however, traders looking to identify patterns or trends may opt for chart types with more information, such as a candlestick.
Example of a Line Chart
Line Charts Explained
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 only show closing prices, they reduce noise from less critical times in the trading day, such as the open, high, and low. Since closing prices are typically considered the most important, it is understandable to see why line charts are popular with investors and traders. Other popular styles of charts include bar charts, candlestick charts and point and figure charts. Traders can use line charts with other charts to help see the full technical picture.
Benefits of Using Line Charts
Clarity: Traders can be overwhelmed with too much information when analyzing a security’s chart. The trading term “paralysis by analysis” describes this phenomenon well. Using charts that show a plethora of price information and indicators can give multiple signals that lead to confusion and complicate trading decisions. 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 price drops below support.
Easy-to-Use: Line charts are 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.
Limitations of Using Line Charts
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 backtest 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.