Investors and financiers rely on charts to make their trades. Line charts and bar charts provide a visual representation of data, read on to learn how to read them.
Data visualisation is so important when trading in capital markets, as it provides an easy way for investors to manage and make decisions. Charts are at the centre of data visualisation as they make it possible for traders to interpret how prices move up and down, as part of technical analysis. Line and bar charts are some of the most widely used data visualisation methods in financial markets.
I. What Is a Line Chart?
A line chart is a data representation method that connects a series of data points in a continuous line. While being the most basic type of chart, it is limited, as it only shows the closing prices of underlying assets.
A line chart stands out in part because it allows traders to see where the price of a security has travelled over time as it only shows closing prices. In addition, line charts allow traders to focus on key price points as they reduce noise from critical times by not indicating opening, high, and low price points.
Line Chart Pros & Cons
Pro – Precise and Clear
Line charts focus on key price points, which is essentially the closing price at any given time, while sparing traders from being bombarded with unnecessary information. The use of line charts allows traders to identify key price points such as support and resistance levels with ease.
Pro – Easy To Use
Line charts are the best charts for novice traders, given their ability to represent crucial data in a simplified manner. For novice traders, line charts act as the foundation of basic chart reading before they make a transition to learning advanced techniques.
Con – Lack of Information
Line charts lack key information that’s crucial for high-level technical analysis. They are limited to closing prices, leaving traders unable to implement trading strategies that require knowing opening, high, and low price points.
II. What Is a Bar Chart
Bar charts allow for some of the most advanced techniques with data representation in financial markets. Unlike line charts, bar charts show multiple price points made up of high, low, opening, and closing points.
Each bar in the chart comes with a vertical line indicating the highest and lowest prices reached during a given period. The opening price for a given period is depicted by a small horizontal line on the left, while the closing price is depicted by a small horizontal line on the right of the vertical line. Colour coding comes into play to show whether the price moved up or down.
Bar charts are a collection of bars depicting price movements at every moment. In minute charts, there will be a price bar indicating how price moved up and down during the minute. A daily bar chart, on the other hand, comes with a price bar indicating where the price opened, how high and low it went during the course of the day, and ultimately where it closed.
Bar Charts Pros & Cons
Pro – Information Abundance
Bar charts come with a lot of information in the form of opening, closing, high, and low points that traders can use to make informed decisions. It is possible to detect the level of volatility in the market by analysing the sizes of the bars. The larger the bars, the higher the volatility.
Pro – You Can Interpret Them Quickly
Colour coding of the price bars to indicate whether the price moved up or down helps in providing information at a glance.
Cons – They Can Be Overwhelming if You’re Not Used to Them
Novice traders may be overwhelmed by too much information provided by bar charts compared to line charts.
