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.

They include:

• 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.

Final Thoughts

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.