Line charts are some the least used charts in all of trading. Though line charts are incredibly simple to read and understand, often they do not show enough data to make intelligible decisions. Though the use of these charts is not at all recommended, I will explain what they are and how they work so you can make your own decision.
How Forex Line Charts Work
Line charts are generally calculated by using the open or close value of a currency pair, then drawing a straight line to connect the points. What this does it show a relatively smooth chart, factoring in only the values at which the currency was priced at certain times.
What The Charts Don’t Show
The worst part about forex line charts is not what they show, but what they do not. For the sake of this discussion, we’ll use a one hour line chart with each point on the chart equal to the price the currency pair opened for that hour.
Here are a few fictional values for our example currency pair, EURUSD, over a 3 hour period. For educational purposes, a value will be posted for 2:30, to show the inherent problems of a line chart.
EURUSD
1:00 value = $1.50
2:00 value = $1.4950
2:30 value = $1.47
3:00 value = $1.50
What You Don’t See In the Data
Now, when we draw the chart with the price being calculated each hour, we see very little in the price. For all we know, the price fell 50 pips to $1.4950 by 2:00 but rose back to $1.50 by 3:00. Because line charts only show the price for one point in time each hour, there is a lot of market data missing. As you can see, the price actually fell more than 300 pips to $1.47 before rebounding, but according to our line graph it only fell as low as 50 pips to $1.4950.
Only Half the Story
You see, a line chart set on a hourly timeframe will only accurately report the price of a currency once every 60 minutes. You’ll only know the price at one point during the whole trading time. This is insufficient data, and making trades based on a lack of data is a sure way to lose money. For this reason, we at ForexOnlineLearning.com suggest utilizing bar or OHLC charts, or candlestick charts as a more accurate way to trade.