Line Chart

A line chart consists of a series of dots that are connected by a horizontal line. This is a very simple type of chart that allows traders to see the movement of the currency. However, it only represents the movement of a currency at a particular time, and can also reflect what happened to the currency throughout a particular day. 

Line charts explained

Many traders who trade the stock market prefer to use line charts to see price moments and fluctuations. This is because they consider the closing price to be the most important. Basically, line charts consist of closing prices for different periods of time.

Since closing prices allow people to see the activity of the security, these charts are popular among both traders and investors. 

Advantages and disadvantages of using line charts

Advantages. Line charts are quite simple to use. Even those traders who got involved in trading recently can understand how it works. Line charts are also useful for teaching new traders the basics of chart reading. 

It is easier for traders to identify trends and chart patterns as well as key support and resistance levels. 

While other charting forms may lag behind in the accuracy of sequence of price data due to small intervals, a line chart can be used to plot data for short intervals, such as 5 seconds or even less. Line charts are also useful for providing traders and investors with a bigger picture while overviewing market trends.

Disadvantages. Line charts lack a lot of information that bar charts, and especially candlestick charts show. For this reason they can be misleading and traders should be cautious if they decide to use this type of charting method. 

One of the other disadvantages is that because of the amount of information provided with security charts, traders tend to be negatively affected, which often results in hesitation and poor trading decisions. There is even a term that is used to describe this situation. Traders usually call it “paralysis by analysis”. 

A line chart doesn't provide traders with enough information to test their strategies. Many traders consider other kinds of charts to be more convenient and practical. 

In order to create line charts traders can use software, and it is also possible to create the charts manually.

Line chart example

Line charts consist of two axes; typically the horizontal axis represents a period of time, whereas the vertical shows the amount of assets. For instance, it is possible to create a line chart that would represent the earnings of a local bakery for five years. On the chart you would be able to see days of the week and the daily income.  

A line chart is widely used in finances, and it is considered to be the simplest of the charts used in this field and most easily understood by beginners. No specialized knowledge is required and they give a big picture of the market. These charts are used to represent the data for any specified period of time. Line charts can be used in conjunction with other types of charts to see a bigger picture. 

The most popular variation of a line chart is the daily line chart, which is based on a closing price of each day.