DEFINITION of Line Chart
A line chart connects a series of data points with a line and is used by traders to monitor closing prices. This is the most basic type of chart used in finance and is created by joining a series of closing prices together. Line charts can be used on any timeframe.
Example of a Line Chart
BREAKING DOWN Line Chart
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. (For further reading, see: Technical Analysis: Chart Types.)
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
Limited Price Information: 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. (For more information, see: Create Your Own Trading Strategies.)