Line Charts in Forex [Explained]

With the advances in technology, Forex traders have developed highly complicated trading methods with sophisticated graphs to predict the price movements of currency pairs. 

But let me tell you something, some of the most successful retail traders believe that the best methods in Forex trading are the more simple ones.

Why?

Because simple methods are easier to understand and therefore easier to use when you trade forex.

Speaking of simple things, do you know what the simplest type of Forex chart used for technical analysis is?

A (simple) line chart.

What is a Line Chart?

A line chart is the simplest type of chart that draws a line from one closing price to the next closing price. Over a long period of many price points (or closing prices), a line chart makes a coherent single line in which trading information can be gathered and analyzed.

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.

Trading with Forex Line Charts

A picture speaks a thousand words so let’s take a look at what a Line chart looks like.

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

On the other side of the coin, 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.

All it shows is that the price of a currency pair or any other asset closed at X at the end of the period. 

You have no clue what else happened.

Was it this?

Or this?

Or perhaps this?

One can only guess!

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.

Should You Be Using Line Charts or Candlestick Charts to trade?

So, what are the best price charts to use when you trade currency pairs? Some would say that a line graphical representation is enough to understand the dynamic and market sentiment. Others need technical indicators and knowing the opening price. Basically, it is a personal preference.

With that being said, you need to know what are the advantages and disadvantages of using line charts.

Advantages of Using Line Charts:

• Line charts filter the market noise.
• The simplicity of line charts makes the Forex market appealing and easy to follow. With a simple continuous line, you can get a sense of the market. 
• The simplicity of a line chart also helps in determining support and resistance level, turning points, and chart patterns.
• Much like a candlestick chart, you can use any time frame you wish.

Disadvantages of Using Line Charts:

• Line charts do not provide enough price information. Many traders believe that both opening and closing prices should be considered. Beyond that, many traders also believe that FX charts with four prices are more effective to analyze a currency pair – opening price, closing price, lowest price, and highest price.
• Its simplicity is also its greatest weakness as it misses out on key data that otherwise would have influenced trading decisions. 
• Line charts can generate a lot of false signals on lower time frames if used incorrectly.

Ready to Trade Line Charts?

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.