What is a line graph?
A line graph is a graphical representation of the action of the historical price of an asset that links a series of data points to a solid line. This is the most basic type of graph used in finance and generally only represents the closing prices of a security over time. Line charts can be used at any time, but most often using day-to-day price changes.
Key points to remember
- A line graph is a way to visually represent the price history of an asset using a single solid line.
- A line graph is easy to understand and simple in form, describing only changes in the closing price of an asset over time.
- Because of its simplicity, however, traders looking to identify patterns or trends may opt for types of charts containing more information, such as a candlestick.
Example of line graph
Line graphics explained
A line graph allows traders to clearly see where the price of a security has traveled in a given period. Since line charts only display closing prices, they reduce noise from less critical periods of the trading day, such as opening, high and low. Since closing prices are generally 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 see the full technical picture.
Benefits of using line graphs
Clarity: Traders can be overwhelmed with too much information when analyzing a stock chart. The commercial term “paralysis by analysis” describes this phenomenon well. Using charts that show a plethora of information and price indicators can give several signals that lead to confusion and complicate business decisions. Using a line chart helps traders to clearly identify the main levels of support and resistance, trends and recognizable chart patterns. For example, the line graph below makes it easy to locate the main support and resistance levels between $ 2.10 and $ 2.70 before the price drops below support.
Easy to use: Line charts are ideal for novice traders due to their simplicity. They help teach basic graphic reading skills before learning more advanced techniques, such as reading Japanese candlestick patterns or learning the basics of dot 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 graphics
Line charts may not provide enough price information for some traders to monitor their trading strategies. Some strategies require prices derived from openness, high and low. For example, a trader can buy a stock if it closes above the high price of the last 20 days. In addition, traders who use more information than the close do not have enough information to backtest their trading strategy using a simple line chart. Candlestick charts, which contain the daily opening, closing, high and low prices of an asset in the same unit may be more useful in these cases.