Line Chart: Definition, Types, Examples

Key Takeaways

A line chart 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.

Understanding 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 the noise from 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 common snapshot of a security's activity.

8xbet1Liên kết đăng nhập — Example of a Line Chart. Image by Sabrina Jiang © Investopedia 2021

Other popular styles of charts include bar charts, candlestick charts, and point and figure charts. Traders can juxtapose line charts with others to help see a fuller technical picture.

Types of Line Charts

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 compound line charts. These charts present data in a clear, concise manner. They help identify trends, make comparisons, and understand changes in different 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. This helps identify general trends and patterns in price changes. For example, you could use one to monitor the trend of the closing price of a stock over a year to assess its performance.

Multiple line charts

These charts involve plotting several lines on the same chart, each representing different data. This is useful for simultaneously comparing the performance of several securities, indexes, and other financial and economic metrics. Comparing the performance of various stocks, sectors, or markets to identify the relative strengths or weaknesses is an example of using multiple line charts.

Compound line charts

Compound line charts, also known as stacked line charts, show the cumulative effect of several 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 Chart 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 view of how an asset or sector is doing.
Comparing performance: When several line charts are overlaid, you can compare different assets and economic and financial data far more easily. This is particularly useful for comparing an asset or sector's performance against a benchmark.
Simplifying complex data: Line charts can help simplify complex data sets, making them more accessible and understandable. Line charts supply a streamlined view by focusing on end-of-period data, filtering out less relevant data.
Strategic decision-making: A clear visualization of trends aids in making informed investment and business decisions, particularly for long-term planning. Trends identified through line charts can also help assess the risk profile of an investment.
Historical analysis: Line charts assess historical market moves, distilling how economies, markets, businesses, and assets have reacted 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, clients, or team members, especially those who do not have a technical background.
Technical analysis: While simpler than other charts, line charts are still helpful in identifying key support and resistance levels in price moves and ratio analysis or relative strength.

When should a line chart not be used?

While versatile and widely used in finance and investing, line charts are not optimal for every analytical scenario. Here are some situations when it's best not to use line charts:

Detailed price analyses: Line charts typically focus on end-of-period prices and do not have the granular details required for intraperiod data, such as the high and low, which may be crucial for traders.
Comprehensive technical analysis: Technical analysts usually prefer bar and candlestick charts, which provide more detailed information, including opening, closing, and high and low prices within a specific time frame. Line charts also lack the necessary detail for identifying complex chart patterns or using advanced technical analysis techniques.
Detailed financial analysis: When analyzing detailed financial data like balance sheets or income statements, line charts may not be suitable because they focus on a single variable over time.
Multifaceted 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 might be necessary.
Sector or portfolio analysis: When analyzing the diversification of a portfolio or the performance of different sectors, other types of visualizations like 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 crucial for accurate analysis and decision-making. For instance, trading and investing platforms offer a range of chart types and analytical tools that cater to different needs in financial analysis. In addition, financial modeling software ordinarily includes various chart options to suit different types of data analysis.

Pros and Cons of Line Charts

Traders can be overwhelmed with too much information when analyzing charts. The trading 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 pinpoint 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 ideal for novice traders because of their simplicity. They help to 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 easily be put into a line chart.

Line charts can be constructed manually or by using apps and software, such as Microsoft Excel or Google Sheets, making it quicker 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 needing more information than the close 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 graph, may prove more useful.

Pros

Clarity and simplicity: Line charts offer a clear, straightforward view of price moves over time.
Easy to use: Line charts are easy to read and interpret, even for those new to finance and investments.
Focus on closing prices: By zeroing in on closing prices, line charts filter out intraperiod volatility, which could be beneficial for long term investment strategies.
Comparative analysis: Line charts are useful for comparing several securities or indexes over time since the simplicity of the lines lets you make easier comparisons without clutter.

Cons

Lack of detailed information: Line charts only show end-of-period prices, omitting important data such as high, low, and opening prices, which are frequently critical for investment strategies.
Oversimplification: The simplicity can also be a drawback, as it may lead to overlooking price moves and volatility, which are important for traders and investors.
Risk of misinterpretation: The focus on closing prices might give a misleading picture in markets where intraperiod changes are significant.

What Are the Parts of a Line Chart?

A line chart, as commonly used in finance and investment analysis, consists of several components that collectively present data in a clear, interpretable manner. These components include data points, the line that connects 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 might also be grid lines for the line chart.

What Is an Example of a Line Chart?

A line chart 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 could create a line chart showing a store's daily earnings for five days. The horizontal axis would include the days of the week, while the vertical axis would show the daily earnings.

How Do I Make a Line Chart in Excel?

In Excel, line charts are appropriate if you have text labels, dates, or a few numeric labels on the horizontal axis (x-axis). Here are the steps to create a line graph in Excel. (If you are using numeric labels, empty cell A1 before you make the line chart):

After entering your values, select the data range (whatever range comprises those values)—for example, A1:D7.
On the “Insert” tab in the “Charts” group, click the Line symbol (“Insert line chart”).
Click "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 a few numeric labels on the horizontal axis (x-axis). Here’s how to do it Google Sheets:

After entering your values, select the data range. Highlight the range of data you want to include in your line chart. For example, if your numbers are in cells A1 to B7, select this range.
Go to the “Insert” tab located in the menu bar. In the drop-down menu, 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, choose “Line Chart.” You can select a specific type like “Line with Markers,” which will place distinct markers at each data point on the line.
The Chart Editor lets you further tailor the chart, like 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, offering a straightforward way to show trends over time. Their simplicity makes them universally understandable. They are versatile and can be customized to suit various contexts, making them indispensable for those in finance and investing.

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