In Forex trading, a chart is used to paint a picture of how the price of a currency pair has moved over a period time.
Therefore, the X-axis equals time and the Y-axis equals price.
What is a line chart?
A line chart is the simplest type of chart available on trading platforms. A line chart, as you have probably guessed, consists of one line going across the chart.
Therefore at any one given time, there is one value for price.
A line chart will always show you the closing price for whatever period you choose to view.
For example, if you are viewing a line chart in days, then the prices shown are the closing price for each day.
Therefore, a line-chart blocks out potential noise made from the open price, high price and low price of the currency pair.
Benefits of the Line Chart
Traders can be overwhelmed with too much information when analysing more complex types of charts. The trading term “paralysis by analysis” describes this phenomenon well.
Using charts that show lots of price information and indicators can give multiple signals that lead to confusion and therefore complicate trading decisions. Using the line chart helps traders clearly identify key support and resistance levels, trends and other recognisable chart patterns (which we will be covering further on in this lesson).
Line-charts are good for spotting long term trends, as you are able to get a feel for how the market is moving, with any major turning points clearly shown.
Line charts are ideal for new traders to use due to their simplicity. They are ideal to teach beginners basic chart reading skills before learning more advanced techniques. Volume and moving averages can easily be applied to aid a line-chart in decision making.
Closing prices are typically considered the most important component of price, it is understandable to see why line-charts are commonly used in traders set-ups. Traders tend to use line charts in conjunction with other charts to confirm whether a price is trending or not.
Drawbacks of the Line Chart
Limited Price Information
Traders who use more information than just the close can’t back-test their trading strategy due to a lack of information on a line chart.
Line charts may not provide enough price information for some traders to monitor their trading strategies. Some strategies require prices derived from the open price, high price and low price. For many decades plenty of traders have wanted more price information than just the close.
- In Forex trading, a chart is used to paint a picture of how the price of a currency pair has moved over a period time.
- On a chart, the X-axis equals time and the Y-axis equals price.
- A line chart is the simplest chart available on trading platforms. At any one given time, there is one value for price.