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A line chart graphically represents an asset’s price over time by connecting a series of data points with a line. This is the most basic type of chart used in finance, and it usually only depicts a security’s closing prices. Line charts can be used for any time frame, but mostly have day-to-day price changes.
Key takeaways
A line graph displays information as a series of data points connected by straight line segments. A line chart visually represents an asset’s price history using a single line. Line charts usually only plot the closing prices, thus reducing noise from less critical times in the trading day, such as the open, high and low prices. Line charts can be simplistic and do not fully capture patterns or trends.
Understand line charts
A line chart provides traders with a visualization of the price of a security over a given period of time. Because line charts usually only use closing prices, they cut through the noise of less critical times in the trading day, such as the open, high, and low prices. Line charts are popular with investors and traders because closing prices are a general snapshot of a security’s activity.
Example of a line graph.
Image by Sabrina Jiang © Investopedia 2021
Other popular styles of charts include bar charts, candlestick charts, and point and figure charts. Traders can compile line charts with others to help see a more complete technical picture.
Types of line cards
Line charts are versatile in finance and investing, and there are different types to suit your analytical needs: simple line charts, multiple line charts, and composite line charts.
These charts present data in a clear, concise manner. They help identify trends, make comparisons and understand changes in various economic and financial metrics.
Simple line charts
Simple line charts are the most basic form, representing data points connected by a single line. They typically show the ending periods of a security or financial and economic data over a given period. Ideally, simple line charts are used to track the price trend of a single asset over time. It helps identify general trends and patterns in price changes. For example, you can use one to monitor the trend of a stock’s closing price over a year to evaluate its performance.
Multiple line cards
These charts involve plotting multiple lines on the same graph, each representing different data. It is useful for comparing the performance of various securities, indices and other financial and economic measures simultaneously. Comparing the performance of various stocks, sectors or markets to identify relative strengths or weaknesses is an example of using multiple line charts.
Composite Line Charts
Composite line charts, also known as stacked line charts, show the cumulative effect of multiple data sets stacked on top of each other. They are used to understand the combined effect of multiple factors on a single outcome or to analyze the composition of a metric over time. Demonstrating how different asset classes contribute to the overall performance of a portfolio over time is a good use of these charts.
What is a line graph used for?
A line chart serves several key purposes in finance and investing, making it essential for analysts, traders and investors. Here are some of its best uses:
Identifying Trends: Line charts are excellent for identifying and analyzing price trends over time. By connecting data points, typically end-of-period prices, you get a clearer picture of how an asset or sector is doing. Compare performance: When multiple line graphs are overlaid, you can compare different assets and economic and financial data much more easily. It is particularly useful for comparing an asset or sector’s performance to a benchmark. Simplifying complex data: Line charts can help simplify complex data sets, making them more accessible and understandable. Line charts provide a streamlined view by focusing on end-of-period data, filtering out less relevant data. Strategic decision-making: A clear visualization of trends helps in making informed investment and business decisions, especially for long-term planning. Trends identified by line charts can also help assess the risk profile of an investment. Historical analysis: Line charts assess historical market movements, distilling how economies, markets, businesses and assets have responded to past events, economic and market cycles, or changes in fiscal or monetary policy.Communication: Line charts are an effective way to communicate financial data to stakeholders, customers or team members, especially those who do not have a technical background. Technical analysis: Although simpler than other charts, line charts are still useful for key support and resistance levels in price movements and ratio analysis or relative strength.
When should a line graph not be used?
Although versatile and widely used in finance and investing, line charts are not optimal for every analytical scenario. Here are some situations when it is best not to use line charts:
Detailed price analyses: Line charts typically focus on end-of-period prices and lack the fine detail needed for intra-period data, such as highs and lows, that can be crucial for traders. Comprehensive technical analysis: Technical analysts usually prefer bar and candlestick charts, which provide more detailed information, including open, close, and high and low prices within a specific time frame. Line charts also lack the detail needed to identify complex chart patterns or use advanced technical analysis techniques. Detailed financial analysis: When analyzing detailed financial data such as balance sheets or income statements, line charts may not be suitable because they focus on a single variable over time. Multilevel data representation: If the analysis requires the simultaneous representation of different types of data, such as price and economic indicators, more complex chart types or dashboards may be necessary. Sector or portfolio analysis: When analyzing the diversification of a portfolio or the performance of different sectors, other types of visualizations such as pie charts or heat maps can be more informative.
Recognizing when a line chart is inadequate and opting for more sophisticated tools or charts is essential for accurate analysis and decision making. For example, trading and investment platforms offer a range of chart types and analytical tools that cater to different needs in financial analysis. In addition, financial modeling software usually includes various charting options to suit different types of data analysis.
Advantages and disadvantages of line charts
Traders can be overwhelmed with too much information when analyzing charts. The trade phrase “paralysis by analysis” describes this phenomenon. Using charts that show too much price information or too many indicators can give confusing signals and complicate trading decisions.
However, a line chart helps traders identify key support and resistance levels, trends and recognizable chart patterns. For example, the line chart below makes it easy to find major support and resistance levels between $2.10 and $2.70 before the price drops below support.
Line charts are also great for beginner traders because of their simplicity. They help teach basic chart reading skills before advanced techniques, such as reading Japanese candlestick patterns or learning point and figure charts. Volume and moving averages can be easily placed in a line chart.
Line charts can be compiled by hand or by using applications and software, such as Microsoft Excel or Google Sheets, which make it faster and more accurate.
However, line charts may not have enough price information for some traders to monitor their trading strategies. Some strategies require prices derived from the open, high and low.
Also, traders who need more information than the near ones to test their trading strategy will have to find other charts. Candlestick charts, which contain an asset’s daily open, close, high and low prices in the same chart, can be more useful.
Clarity and Simplicity: Line charts provide a clear, simple view of price movements over time.
Easy to use: Line charts are easy to read and interpret, even for those new to finance and investing.
Focus on closing prices: By zeroing in on closing prices, line charts filter out intra-period volatility, which can be beneficial for long-term investment strategies.
Comparative Analysis: Line charts are useful for comparing various securities or indices over time, as the simplicity of the lines makes it easier for you to make comparisons without clutter.
Lack of detailed information: Line charts only show prices at the end of the period, omitting important data such as high, low and opening prices, which are often critical to investment strategies.
Oversimplification: The simplicity can also be a disadvantage, as it can lead to ignoring price movements and volatility, which is important for traders and investors.
Risk of misinterpretation: The focus on closing prices can give a misleading picture in markets where intra-period changes are significant.
What are the parts of a line graph?
A line chart, as commonly used in financial and investment analysis, consists of several components that collectively present data in a clear, interpretable manner. These components include data points, the line connecting these data points, the vertical and horizontal axes, the scale of the axes, labels for the data, the title of the chart, and the key or legend. There can also be grid lines for the line graph.
What is an example of a line graph?
A line graph is used to show the change in information over time. The horizontal axis is usually a time scale, such as minutes, hours, days, months, or years. For example, you can create a line chart that shows a store’s daily earnings for five days. The horizontal axis will include the days of the week, while the vertical axis will show the daily earnings.
How do I make a line graph in Excel?
In Excel, line charts are appropriate if you have text labels, dates, or some numerical labels on the horizontal axis (x-axis). Here are the steps to create a line chart in Excel. (If you use numeric labels, clear cell A1 before making the line graph):
After entering your values, select the data range (whatever range those values comprise)—for example, A1:D7. On the “Insert” tab in the “Charts” group, click the line symbol (“Insert Line Chart”). “Line with Markers.”
How do I make a line chart in Google Sheets?
As with Excel, line charts are good to use when you have text labels, dates, or some numerical labels on the horizontal axis (x-axis). Here’s how to do it in Google Sheets:
After entering values, select the data range. Highlight the range of data you want to include in your line graph. For example, if your numbers are in cells A1 to B7, select this range. Go to the “Insert” tab in the menu bar. In the drop-down list, find and click on “Chart.” This opens the Chart Editor on the right side of your screen. In the Chart Editor, under the “Chart Type” drop-down list, select “Line Chart.” You can select a specific type such as “Line with Markers,” which will place clear markers at each data point on the line. The chart editor lets you further customize the chart, such as the names of the chart and different axes, line colors, and the format of your data labels, for more clarity and visual appeal.
The Bottom Line
Simple line charts are essential in data visualization, providing a simple way to show trends over time. Their simplicity makes them universally understandable. They are versatile and can be adapted to suit various contexts, making them indispensable for those in finance and investing.
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