Stock Line charts are considered the most basic chart patterns while conducting market analysis. It is composed of a single line which specifies the price points connected through them.
Line charts are one of the simplest kinds of charts that are analysed to depict price changes at a few intervals of time. Traders use line charts because line charts depict a series of data points which is useful to assess the stock’s price during day trading.
To understand further use of line charts in day trading, read this blog till the end.
Line Charts are one of the simplest kinds that display information through an interval of time. Usually, in charts, only a single point is graphed to depict the closing price. In line charts, a series of these points are developed to create a straight-line segment.
According to the time frame you select in the chart, say 15 minutes, 5 minutes or 30 minutes, the graph constitutes the line. The series of points can also be plotted during intraday trading as price changes continuously during the market. By plotting each trade on the time intervals the line chart can be created for a specific index or stock.
Some of the points to remember for the line chart meaning
Line charts in stock markets usually depict the closing prices of stocks or indexes.
Line charts reduce noise from the markets and hence, it is easier to compare different stocks with less noise.
A Line chart helps in representing the price of an asset and its history within a continuous straight line.
A line chart is easy to depict and use by traders.
However, if a trader is looking to implement advanced technical strategies, then they may opt for different charts like candlesticks.
Now, that you know what a line chart is, let’s move on to analyse the use of a line chart in stock markets.
The stock market is a sea of technical terms and indicators which traders can use when they are experienced in the area.
But, what about beginner traders?
Well, Line charts uses are for beginner traders that is ideal for them to start with chart analysis. With a basic understanding of stock markets, you can understand the chart reading skills and basic points of charts. For example, moving averages method and volume are easily applied to line charts to depict the trends in the stock’s movement.
A line chart is formed by connecting the stock’s prices. For example, if the HDFC Bank’s stock price is closed at 1490, 1495, 1445, 1470 and 1501, then the chart will be created using these points by drawing a line.
The technical patterns can be used in a line chart first and then in other charts like bars, and candlesticks to confirm it. Identification of chart patterns with less noise in a line chart can provide a clear vision to the trader.
Although the line chart cannot help in enormous trading movements, it is suitable for the basic setup and beginner’s trading analysis. Therefore, the use of a line chart with moving averages and its price action will be conducted below:
Price action in a line chart technical analysis is developed through the swings that form a directional change in the chart. When you observe the line chart below, you can observe that an ascending pattern is created by joining the swings.
The line chart helps in clearly analysing the pattern, as you can observe that the pair broke out from the lower side of ascending channel. Further, you can take the help of a candlesticks chart to calculate the open and close prices.
Ascending channel is a bearish breakout pattern where the possibility is that the price will continue to drop further. Thus, you can identify the patterns like ascending, descending, bearish flag and bullish flags clearly from the line charts.
Another combination with a line chart can be the use of a moving average which is a promising way to find the trend of the stock. Moving average with a line chart is a technical trading strategy which is used by beginner traders to enter the stock market.
In a line chart of a stock, you need to find the trend following moments to implement the moving average strategy. As soon as you find a trend on the chart, add moving averages to identify where the reversal can take place. Line graphs with the addition of moving averages can analyse the change in market direction.
The line chart follows certain rules and estimations while connecting the closing points of the stock prices.
Some of the best practices to use a line chart are given below.
5.1 Line Chart doesn’t Plot Many Lines
In a single chart, there is a technical capacity to draw as many lines as possible. Although, it is not a good idea to plot all the values at once. It is recommended that a basic limit of 5 lines should be maintained while analysing stocks.
There is an availability of different colours in the chart, however, make sure to follow the limit to save yourself from interpreting the wrong data. The following line chart shows the tangled and untangled version of a line chart in share market. Plotting lines with untangled versions can be beneficial for technical analysts.
5.2 Analysts should choose the appropriate measurement Interval
Selecting a suitable time interval is a must for line charts as it can suggest proper information to the analysts. For example, if you are selecting monthly data as the interval to create a temporal data chart then you will find it long to see where the trend is going. On the other hand, the selection of short interval data for 10 years of investment can reveal current market noise rather than proper signals.
The line chart is a basic chart used by technical analysts when they are in their beginner phase. Like there are several uses of a line chart, limitations include as well. Some of them are:
Too much information is not properly handled using a line chart.
The line chart does not provide enough price information, open, close, high and lows.
Too many line charts make the chart cluttered and hard to analyse.
Line charts are not suitable for long-term investment analysis or technical indicator analysis as it does not provide additional information.
The line chart considers only the closing prices of stocks which is a limitation.
The line chart offers a trader a basic outlook on stock market charts. A beginner trader or analyst can develop the habit of reading charts by beginning with line charts. Well, in this blog you have encountered limitations of line charts which are true, although for a trader’s journey the starting point is observing the line charts to predict the trend.
A line chart uses the closing price to find the price points of stocks. Analysts draw lines to observe the price patterns and then can move on to find additional details through candlesticks or bar charts.
Line charts are basic pattern charts in the stock market
Line charts consider the closing price of stocks to connect to make a line
Line charts reduce noise from the markets
Interval should be carefully selected when using a line chart
Price action in the Line chart is developed through high and low swings
A line chart can be used to find ascending, descending and other patterns
The line chart and moving averages method are used as a trading strategy