The Line Chart draws the unbroken line between the points of the closing prices for the selected time frame on the charts.
It 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 quickly assist traders in their technical assessment of price action by showing the general trend.
The Line Charts can be used on any timeframe, but most often using day-to-day price changes. Traders can use line charts with the other chart types to see the full technical picture.
Principles of the Line Chart #
A line chart gives traders a clear visualization of where the price of a security has traveled over a given time period (1 day by default in Ananda).
Because line charts only display the closing prices, they reduce the 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.
This chart is also good for visualization of the overall trend of a security.
The main benefit of using the Line Chart is its clarity. Traders can be overwhelmed with too much information when analyzing Bar Charts or Candlestick Charts.
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 XAUUSD line chart below makes it easy to locate major support and resistance levels between USD 1924.38 and USD 1898.46 before the price drops below support.
The other benefit of the Line Chart is that it is 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 Candlestick patterns or learning the basics of point and figure charts.
The Line Charts lack detail and nuance. You get an impression of trend in a glance, but you do not get a “feel” for how the trend was constructed.
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.