Table of Contents
- What Is a Line Chart?
- Key Takeaways
- How Line Charts Work
- Types of Line Charts
- What Is a Line Chart Used For?
- When Should a Line Chart Not Be Used?
- Pros and Cons of Line Charts
- How to Make a Line Chart in Excel
- How to Make a Line Chart in Google Sheets
- What Are the Parts of a Line Chart?
- What Is an Example of a Line Chart?
- What Is a Candlestick Chart?
- The Bottom Line
What Is a Line Chart?
I'm telling you directly: a line chart is a straightforward visualization that shows the closing prices of a security over time by connecting data points with a line. This is the simplest chart you'll encounter in finance, and it usually just focuses on those closing prices. You can apply it to any timeframe, but it's most common for daily changes.
Key Takeaways
Let me lay this out plainly: a line chart gives you a visual of an asset's price history through one continuous line. It sticks to closing prices, which cuts out distractions from opens, highs, and lows during the day. These charts are basic and might not catch every pattern or trend fully.
How Line Charts Work
Here's how it functions: a line chart lets you see a security's price over a set period, mainly using closing prices to minimize noise from less important moments like opens, highs, and lows. Traders and investors like them because closings provide a solid summary of the day's action. You can pair them with bar charts, candlesticks, or point-and-figure charts for a broader view. Look at an example image of a line chart showing price movements—it's by Sabrina Jiang from Investopedia 2021, illustrating the concept clearly.
Types of Line Charts
Line charts come in handy variations for finance and investing. They present data clearly and help you spot trends, compare metrics, and track changes in financial indicators. The simple type connects data points with one line, showing closing prices or economic data over time—use it to track a single stock's trend for a year and gauge its performance. Multiple line charts plot several lines on one graph for comparing different securities or indexes, like assessing stocks against sectors to spot strengths and weaknesses. Compound or stacked line charts show cumulative effects by layering data sets, ideal for seeing how asset classes add up in a portfolio's overall performance.
What Is a Line Chart Used For?
You should know a line chart has key roles in finance. It excels at spotting price trends by linking end-of-period data for a clear view of asset or sector performance. Overlay multiple lines to compare assets against benchmarks easily. It simplifies complex data by zeroing in on essentials, making info more accessible. For decisions, it supports long-term planning and risk assessment through trend visualization. Use it for historical analysis of how markets reacted to events or policies. It's great for communicating data to non-experts, and even in technical analysis, it helps identify support, resistance, and relative strength.
When Should a Line Chart Not Be Used?
Be aware, line charts aren't always the best choice. Skip them for detailed price breakdowns needing highs and lows, as they only show closings. Technical analysts prefer bars or candlesticks for full open-close-high-low info and complex patterns. They're not suited for in-depth financial statements like balance sheets. For multifaceted data with prices and indicators, go for dashboards. In portfolio or sector breakdowns, pie charts or heat maps might work better. Recognizing these limits ensures you pick the right tool—platforms and software offer plenty of alternatives.
Pros and Cons of Line Charts
Traders often get bogged down by too much data, leading to 'paralysis by analysis' with confusing signals. A line chart cuts through that by highlighting support, resistance, trends, and patterns—see an example where levels between $2.10 and $2.70 are clear before a drop, from Sabrina Jiang at Investopedia 2021. They're perfect for beginners to learn chart reading before tackling candlesticks or point-and-figure. You can add volume or moving averages easily. But some strategies need opens, highs, and lows, so you might need other charts. On the pros side, they provide clear, simple views of price moves, are easy for newcomers, focus on closings to filter volatility for long-term strategies, and enable clean comparisons without clutter. Cons include missing key details like highs and opens, potential oversimplification that ignores volatility, and risk of misreading in markets with big intraday swings. You can build them manually or with tools like Excel or Google Sheets.
How to Make a Line Chart in Excel
If your x-axis has text labels, dates, or a few numbers, line charts fit well in Excel. Leave cell A1 empty for numeric labels. Enter your values, select the range like A1:D7, go to Insert tab, click the Line symbol in Charts, and pick Line with Markers.
How to Make a Line Chart in Google Sheets
Same as Excel for labels on the x-axis: select your data range like A1:B7 after entering values, go to Insert, click Chart, and in the Editor, choose Line Chart under Chart Type—opt for Line with Markers. Customize further with titles, colors, and labels in the Editor.
What Are the Parts of a Line Chart?
A line chart includes data points, the connecting line, vertical and horizontal axes with scales, data labels, a title, possibly a legend, and grid lines—all working together for clear presentation.
What Is an Example of a Line Chart?
Think of tracking a store's daily earnings over five days: x-axis for days, y-axis for earnings, showing changes over time.
What Is a Candlestick Chart?
Candlestick charts display daily open, close, high, and low in one graph, incorporating sentiment and data—originating in 18th-century Japan for technical analysis.
The Bottom Line
Simple line charts are key for visualizing trends over time in a straightforward way. Their ease makes them accessible, and you can adapt them for various financial contexts, making them essential in investing.
Other articles for you
Financial engineering applies mathematical and computational techniques to solve financial problems and innovate products in the markets.
Paid-up additional insurance lets you use dividends from your whole life policy to buy extra coverage that boosts death benefits and cash value without more premiums or medical checks.
A pattern day trader is someone who executes four or more day trades in five business days using a margin account, facing restrictions like a $25,000 minimum equity requirement.
A white elephant refers to an asset or investment that is costly to maintain, unprofitable, and hard to sell.
The Halloween Massacre was the 2006 Canadian government decision to tax income trusts like corporations, causing a sharp drop in their value.
The terminal capitalization rate estimates a property's resale value at the end of its holding period by dividing the expected net operating income by the rate.
Collateral is an asset pledged by a borrower to secure a loan, reducing lender risk by allowing seizure upon default.
Voluntary simplicity is a lifestyle choice focused on reducing material consumption for a more meaningful, less stressful life with environmental benefits.
An order-driven market is a trading system where buyers and sellers directly display their bids, asks, and quantities, contrasting with quote-driven markets that rely on market makers.
Market indicators are quantitative tools that analyze stock or index data to predict market movements and assist in investment decisions.