Line Charts in Stocks

As technology advances, so does the stock market.

And as the stock market advances, so do trading methods.

And with sophisticated trading methods come sophisticated charts.

Do you see where I am going with this?

In this lesson, we’re going to talk about charts. Namely, we’re going to talk about line charts.

Now, don’t be thrown off by me talking about sophisticated charts

In fact, some of the most successful traders believe that the best methods are the more simple ones.

Why?

Because simple methods are easier to understand and therefore easier to use.

With that said, stock traders believe that line charts are exactly that – simple and easy to use.

What are Line Charts?

Line charts are believed to be the simplest, most basic type of chart used for stock trading.

Line charts draw a single, continuous line from one closing price to the next one and over a long period of many closing prices. This then forms a coherent line in which information about a certain stock can be gathered.

This type of chart provides traders and investors with a clean & easy to understand the view of the stock prices as they filter out all the market noise.

Now, we can only say as much without showing you what line charts actually look like. 

And you know what they say, a picture speaks a thousand words so let’s take a look!

line chart

On a line chart, the X-axis (Horizontal Axis) is the independent variable and represents the time period.

The Y-axis (Vertical Axis) is the dependent variable and shows the price of security you are tracking.

Seems pretty simple to follow, right?

Well, that’s because it is! However, the downside of it is that even though a line chart shows a clear overview of what has been happening in the stock market, they don’t necessarily provide traders with much information or detail about historical price action within a certain period of time.

All they show is a series of data points and their closing price at the end of each period. Everything else is a big question mark. 

That’s why this type of chart is usually used to get the bigger picture view of price movements.

Fun Fact: Charles Dow, the developer of Line Charts, was only interested in the closing price of the instrument, as she believed the close determines each trading day’s unrealised profit or loss.

Advantages & Disadvantages Of Using Line Charts

Advantages of using Line Charts:

  • Line charts filter out all of the market noise.
  • Their simplicity makes the market appealing and easy to follow.
  • The simplicity of the line chart also helps traders determine the support and resistance level, turning points and various chart patterns.

Disadvantages of Using Line Charts:

  • Line charts filter out too much market noise and do not provide enough price information.
  • Line charts miss out on key data that would otherwise impact trading decisions. 
  • Line charts can generate a lot of false signals if used incorrectly.

Wrapping Up

Even though line charts may be too ‘simple’ for some. they still provide us with important information and their traders worldwide who still incorporate them into their trading strategies and use them to make daily trading decisions. Above other things, they can be super useful to technical analysts to spot low prices, high prices, trends, draw trend lines, find key support & resistance levels (or support & resistance points).

Do you think you will be trading Line Charts?

In the next couple of lessons, we will cover some more advanced techniques and charts. We will take a closer look at the two other most popular chart types used for technical analysis – Candlestick Charts and Bar Charts.