A line chart is the most basic type of trading chart created through the connection of a series of data points with unbroken line(s). It is used in trading and finance to display a series of past and present prices for a single stock symbol or more.
A line chart is important to traders and investors since they (traders and investors) consider the closing price to be more important than the open, low and high price over a particular period.
Apart from providing data that allows traders and investors to analyze the market or a particular symbol, a line chart makes it easy to spot trends. This is possible as a result of less noise. In trading, a line chart has the X (horizontal) and Y (perpendicular) axis. The X axis represents the time in form of days while the Y axis represents price.
How Line Charts Work
As said earlier, a line chart is created by a series of data points which are connected together by a line. For this to be possible, the line chart must be fed with data which includes open, high, low and close. Line charts have both X (horizontal) and Y (vertical) axis. On the X axis, time is plotted inform of days and months while on the Y axis, the stock price is listed.
In trading, line charts are used to track the progress of a single stock. For example, it is used to track the stock of Company A, B and so on. As you already know, line charts derive their data from brokerage firms. What you need to know is that there are several factors affecting share price.
- Announcement of dividends
- News release on the company’s earnings and profits
- News that the company has secured a new large contract
- News on employee layoffs
- Change in management
- Accounting error or a scandal in the company
- Interest rates, inflation and deflation among others
Depending with the above factors and more, the price of a stock will either rise or fall. The rise and fall in share price may be small or slightly bigger. When this happens, a data point is created on the line chart. Since the systems are monitoring the performance of Company A stock, several data points will be plotted continuously.
To provide easy analysis, the system will connect the data points with a single unbroken line as time progresses. In the end, traders will be presented with a progressive line chart that reveals trends (uptrend or downtrend) together with closing prices which will form the historical data.
How To Trade With Line Charts
For beginners, looking at a line chart may seem gibberish but for professionals, this is a gold mine to profit from a particular stock. Trading with line charts is not as easy as you may think. You have to combine different indicators and strategies in order to profit.
Some of them include:
- Support and resistance
- Highs and lows
- Head and shoulder pattern
- Trend lines
- Inverted head and shoulder pattern among others.
So, start researching and learning more about indicators, tools and strategies to use when trading line charts.
A line chart is an important tool that helps traders analyze a stock. To trade effectively with line charts, traders and investors must use indicators, tools and strategies like trend lines, head and shoulder pattern among others. To be a professional trader, seek the help of a mentor.