In short: A line chart connects data points using a line, usually from the closing price of each time period.
The line chart is the most basic chart type and it uses only one data point to form the chart. When it comes to technical analysis, a line chart is formed by plotting the closing prices of a stock or an index. A dot is placed for each closing price and the various dots are then connected by a line.
The line charts can be plotted for various time frames namely monthly, weekly, hourly etc. So, if you wish to draw a weekly line chart, you can use weekly closing prices of securities and likewise for the other time frames as well.
Charts often include an overlaid mathematical function depicting the best-fit trend of the scattered data. This layer is referred to as a best-fit layer and the graph containing this layer is often referred to as a line graph.
It is simple to construct a “best-fit” layer consisting of a set of line segments connecting adjacent data points; however, such a “best-fit” is usually not an ideal representation of the trend of the underlying scatter data for the following reasons:
- It is highly improbable that the discontinuities in the slope of the best-fit would correspond exactly with the positions of the measurement values.
- It is highly unlikely that the experimental error in the data is negligible, yet the curve falls exactly through each of the data points.
In either case, the best-fit layer can reveal trends in the data. Further, measurements such as the gradient or the area under the curve can be made visually, leading to more conclusions or results from the data table.
A true best-fit layer should depict a continuous mathematical function whose parameters are determined by using a suitable error-minimization scheme, which appropriately weights the error in the data values. Such curve fitting functionality is often found in graphing software or spreadsheets. Best-fit curves may vary from simple linear equations to more complex quadratic, polynomial, exponential, and periodic curves.
The advantage of the line chart is its simplicity. With one glance, the trader can identify the general trend of a security. However, the disadvantage of the line chart is also its simplicity. Besides giving the analysts a view on the trend, the line chart does not provide any additional detail. Plus the line chart takes into consideration only the closing prices ignoring the open, high and low. For this reason, traders prefer not to use the line charts.