Line Graph Explained
In forex trading, there are different types of charts that help you visualise price patterns. One such chart is the line graph.
If you are looking to trade with the line graph, make sure to stick with us till the end, as we discuss all the nuances of the line graph.
What is a line graph?
A line graph is the most basic and basic form of forex chart used to evaluate financial markets. The line chart is sometimes known as a close-only chart because it displays the underlying pair’s closing price. In addition, it has a line that connects the dots formed by the close price.
A graph in this chart can provide price data for the underlying currency pair. The time is shown on the graph from left to right along the horizontal axis (x-axis). And the price tiers are arranged vertically from bottom to top (y-axis).
Typically, the price data used in line charts is the underlying commodity’s close price. However, the line chart’s biggest strength is its clean simplicity. This is because it provides a clean, easily visible display of price change. As a result, it’s an excellent tool for detecting support and resistance levels, trend lines, and some charts.
However, because the line chart does not display lows and highs, it does not illustrate the price range for the session.
Regardless, Charles Dow had a strong preference for them. He was primarily concerned about the price’s closing level. He considered this to be the essential pricing data because it determined the unrealised profit or loss for that period.
The candlestick and bar charts do not specify a high or low point. Instead, they are more based on straight lines formed between closing prices.
This chart type is frequently used in reports and presentations to demonstrate general price fluctuations. However, when compared to other charts, they lack granular information.
How to read a line graph?
The forex line graph is the same as the line chart you studied in grade school science class. It is made up of two axes that are perpendicular to one another.
A variable on the horizontal axis displays continuous values with a consistent measurement interval. This variable is typically temporal, producing an observation every minute, hour, day, week, or month.
There will be a second numeric variable on the vertical axis for points that fall within each interval defined by the horizontal-axis variable.
You may also compare the trend of several series by plotting multiple lines in a single line chart. It is usual to see data broken down into many subgroups. The ability to plot many lines provides the line chart with a unique use case.
A histogram is often used to depict the frequency distribution of a single numeric variable. However, plotting two histograms on the same axis is difficult. As a result, as an alternative, the line chart serves as a good way of comparison.
What does a line graph tell you?
Line charts are useful for visualising where the price of a currency pair has moved over time. Because line charts only show closing prices, they filter out noise from less important times of the trading day.
Given the importance of closing prices, it’s easy to see why line charts are popular among traders. Traders can combine line charts with other charts to get a complete understanding of the technical picture.
To utilise a line chart, data must be organised in a table with two or more columns. The first column of data shows the placements of points on the horizontal axis for each line that traders must plot. The vertical position of points on a single line is shown in each column that follows.
Some tools generate line charts from a different data format with three columns. They do this regardless of how many lines they have to plot. In these cases, the columns indicate the vertical and horizontal values, as well as which line each row will appear on.
Line graph trading strategy
There are two most common line graph trading strategies; trendline and support and resistance trading strategy.
1. Trendline trading strategy
Trendlines are straight lines drawn on a graph that connect support and resistance points in an uptrend or resistance points in a downturn. A trend line might climb, fall, or move in a zigzag pattern. Trend lines are drawn to connect two or more support points that define a trend.
Drawing a trendline on a line chart is simple.
Line charts enable traders to easily recognise trends and chart patterns. As seen in the GBP/USD graph above, the line chart makes it simple to identify a decline.
2. Support and resistance trading strategy
Technical analysis is built on the concepts of support and resistance. The more experienced traders understand that support and resistance levels serve as a starting point for predicting what will happen next in terms of price movement.
As you can see in the chart below, recognising support and resistance levels is simple with line charts.
Pros of a line graph
- When analysing a chart, it is easy to become overwhelmed by the amount of data. Using charts that display diverse pricing data might produce a variety of signals that can be perplexing. A line chart can assist you in detecting important resistance and resistance levels.
- Because they are basic, line charts are perfect for new investors. They help to educate basic chart reading skills before moving on to more advanced strategies.
Cons of a line graph
- They may not provide sufficient pricing data for some traders to monitor their trading strategies. Some strategies necessitate obtaining prices from the open, high, and low. For example, a trader may buy a currency pair if it closes above the previous week’s high price. Candlestick charts with daily open, close, high, and low prices may be more useful in these circumstances.
If you are looking for a forex chart that can cut through the noise and don’t overwhelm you with lots of information, then a line graph is a perfect fit.
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