Line charts are a form of chart type that takes into consideration the closing price for a particular period of time. It is the simplest form of plotting price on a chart and works in any markets. Perhaps the biggest advantage of using line charts is that this chart type works in any market, regardless of liquidity. The basic tenets of technical analysis are still applicable to line charts which make it a powerful yet simple chart type to use. The line chart is plotted along an X and Y axis, representing Time and Price and can be plotted in any time frame… from Monthly or yearly and down to the five or one minute chart.
Line chart comparison with Candlestick and Bar Chart
The chart above shows a comparison of the line chart along with a Bar chart and Candlestick chart. Notice that the lack of liquidity on WTI Spread Swaps makes the Bar and Candlestick chart hard to decipher, whereas the line chart gives a more meaningful representation of the same.
One of the biggest issues with line chart however comes from the fact that when using it in real time, the line chart is not complete unless the period it is plotted on comes to close. In other words, during a daily time frame, price can make a high and a low. Over the course of the day, the line chart fluctuates with the actual price. So if price closes 50 pips from the high, at some point the line chart may point high but at the end of the trading period (or time frame) the actual close will be 50 pips away from the high. Therefore, when using a line chart, always focus attention to the previous close.
The following chart shows the EURUSD overlaid against the line chart and the candlestick chart. It is easy to see how the high/low and open are ignored (but the line chart tracks them) until it settles for the closing price during that period.
Technical Analysis using Line Charts
Due to its simplicity, Line charts can be used for regular technical analysis. Line charts are best used for plotting trend lines, support and resistance levels. Although not accurate, line charts tend to remove a lot of subjectivity from the simple aforementioned tasks.
In the chart above we see a comparison between line and candlestick charts in regards to plotting trend lines and support/resistance levels. Notice how easy it is to plot interim support and resistance levels by simply identifying areas of price reversals. But traders should be cautious because the line chart plots only closing prices, the spikes are not taken into consideration which can be clearly seen when comparing the highs and lows near the support and resistance lines drawn on the chart.
Besides the obvious chart patterns such as head and shoulders, triangles, etc are much more valid on a line chart. This is due to the fact that traders give more weight to the closing price than the highs and lows created during a period of time.
Line Charts – Advantages and Disadvantages
- Line charts are simple to plot as they only track the closing prices
- Works even in illiquid markets and tends to be more meaningful
- Chart patterns are more valid on line charts as they reflect the closing prices
- Basic technical analysis such as trend lines, support/resistance levels, Fibonacci levels are easier to draw
- Because line charts ignore the highs/lows stops or target levels must be placed accordingly taking into consideration the volatility
- Market sentiment is a bit harder to read due to lack of the day’s sentiment (open/close) not reflected in line charts