Understanding Line Charts in Forex

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One of the simplest ways to view the price fluctuations of currency pairs in the forex market, or any other financial market, is the use of line charts.

In this piece, we’ll show you what a line chart is and how to use it in your trading.

What is a Line Chart?

A line chart is the simplest type of chart that draws a line from one closing price on a time period to the next closing price. Given enough price points over time, a line chart forms a unified path that reveals trading patterns and trends upon analysis.

This type of Forex chart provides traders with a clean, easy-to-understand view of the instrument’s price action as it filters out all the noise.

How to Read the Line Charts

As you can see in the image below, line forex charts show only a single line but exactly the same data you can get on a candlestick chart, only with less details.

line chart, forex trading

On the horizontal axis, you’ll find dates. And on the vertical axis, you’ll find prices. So, the line is a graphical representation of how the price has moved over time.

On the other side of the coin, though, a Forex line chart is simple to follow, but it does not provide the trader with much detail about price behavior within the period, especially compared to a bar chart or candlestick chart.

For instance, unlike the bar or candlestick charts, line charts don’t reflect the intensity of trading battles between buyers and sellers within a given timeframe. All it shows is that the price of a currency pair or any other asset closed at X at the end of the period. 

That’s why this type of chart is usually used to get the bigger picture view of price movement. When you read forex charts, you want to be able to analyze the currency by using technical analysis indicators, view the open and close prices, and get a sense of how price changes in various time frames.

Fun Fact: Charles Dow, the developer of Dow Theory, was only interested in the close of a financial instrument, as the close determines each day’s unrealized profit or loss.

Advantages and Disadvantages of Line Charts

The line chart is the simplest way of representing price movements. That’s a huge advantage. However, it has some shortcomings too.

Let’s see the advantages and disadvantages of line charts:

Advantages of Using Line Charts:

  • A line chart is the most basic, simple, and clear type of a Forex chart
  • Easy to understand for novice traders
  • Useful for quick identification of the trend of a currency pair
  • A line chart excludes all market noise
  • Suited for updates on developments when you are on the go
  • Easy to identify support & resistance levels and graphical models

Disadvantages of Using Line Charts:

  • Insufficiently informative and does not contain complete information compared to other technical analysis charts
  • Only suitable for the superficial study of price 
  • Many price movements are overlooked
  • Uses the closing price only
  • Does not show price extrema – no opening and closing prices like on other trading forex chart.

Best for: Novice traders, long term position traders

Key Takeaways

  • Line charts are a basic but effective graphical representation of price movements.
  • Line chart simplicity is a double-edged sword, offering clarity but omitting critical trading data.
  • A line chart makes it easy to spot price trends at a glance.
  • The choice of forex charts hinges on a trade-off between simplicity and the need for detailed analysis.

Wrapping Up

So, what are your thoughts? Will you be using a line chart when trading? Do you think a line chart provides enough information to use in your trading strategies? The bottom line, it depends on the way you are going to trade the foreign exchange market.

If you are planning to rely on general market commentary and financial news, then a line chart might do the work for you. Otherwise, if you are looking for a more in-depth trading chart where you can integrate technical indicators such as MA, RSI, and Bollinger Bands – then, a candlestick chart is the ideal choice. 

Next up, let’s take a look at trading with Bar charts and Candlestick charts.

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