Question 1 - Define Line charts in your own words and identify the uses of Line charts
When it comes to technical analysis, charting tool and price chart are key. A cryptocurrency chart is basically a graphical visual representation of what is happening in the market, in terms of price action over a period of time. At the moment, there are different types of charts developed for visually representing price information on any cryptocurrency asset over a time period.
A line chart is one of the common types of charts that are available on various charting platforms such as tradingview. A line chart is basically a type of chart that simplifies price information on a chart. On a Line chart, each time period has one point which represents the closing price of that time period. Each point on the line chart is connected to the previous point by a line. This means that a continuous line connects the closing price of each period to the previous closing price. This continuous line connection between the different points forms the line chart. A Line chart can be used on any timeframe for technical analysis of any cryptocurrency asset.
Line chart on AAVE/USDT Chart
The uses of Line charts
One of the main use of a line chart is for simplicity of the price information of the market, by visually representing the changes in the closing price of any cryptocurrency asset over a time period.
Line chart can also be use quickly identify support and resistance areas on the price chart
Line chart can be used to quickly identify price direction or trends or patterns in the market because of its simplicity.
Line chart can be used to reduce the noise caused by price fluctuations especially seen when using the candlestick chart from open, highs and lows prices. The line charts helps to reduce the noise by only representing the closing prices.
Line charts is used by a lot of traders during technical analysis to quickly identify changes in the market over a particular period of time
Question 2 - How to Identify Support and Resistance levels using Line Charts (Demonstrate with screenshots)
When it comes to technical analysis, support and resistance play a very important role in predicting the direction the market will go.
Support level is basically the ground floor in which the price of a particular cryptocurrency asset fails to fall below the support level during a downward price movement before the price bounce up and reverses to the upward direction.
Resistance level is basically the ceiling or roof in which the price of a particular cryptocurrency asset fails to rise above the resistance level during an upward price movement before the price bounce down and reverses to the downward direction.
Identifying support and resistance areas can help in determining trends in the market and also price reversals. One of the main benefits of the line chart is that is helps to simplify the chart to make it easier to identify support and resistance areas on the chart. This is done by only representing the closing prices.
Support level identified on the ETH Line Chart
Resistance level identified on the ETH Line Chart
When support and resistance level are identified, it can help traders and investors make the right decisions in the market. A support level identified can mean that the buyers are still in control of the market. This means that there is a possibility that the price would reverse upwards. Also, when there is a strong bearish trend, support levels can become resistance level when the price breaks below the support level. Traders can make use of support levels to know when to buy.
A resistance level identified can mean that the sellers are still in control of the market. This means that there is a possibility that the price would reverse downwards. Also, when there is a strong bullish trend, resistance level can become support level when the price breaks above the resistance level. Traders can make use of resistance levels to know when to sell.
Question 3 - Differentiate between line charts and Candlestick charts. (Demonstrate with screenshots)
The line chart contains less price information on the chart, with more focus on the closing prices, which makes it have more simplicity.
While the candlestick chart has more price information on the chart which makes it have more complexity.
The line chart is visually represents the closing price information connecting the closing prices using a line. While the candlestick chart makes use of candles with body and wick to visually represent the price information. Each candlestick represents the opening, closing, highs and lows prices.
Line chart helps to remove the noise from price movements and focuses more on the closing prices. This makes it easier to understand the overall direction of the market for long term traders. While candlestick chart offers more information on the price movements, making it great for short term traders.
On a Line chart, each time period has one point which represents the closing price of that time period. Each point on the line chart is connected to the previous point by a line. This means that a continuous line connects the closing price of each period to the previous closing price. While,
On a Candlestick chart, there are more price information for each time period. Each candle on the candlestick chart visually represents different price information such as the open, close, highs and lows prices. This means that the open price at the beginning of the time period, the close price at the end of the time period, and the high and low prices reached in the time period.
The line chart only has a line which moves in the direction of the closing prices. While a candlestick has red and green candles depending on the direction of the price. Red candles shows that the price is bearish and green candles shows that the price is bullish.
Because of the simplicity of the line chart, it doesn’t provide much information on what is happening in the market. While a candlestick chart provides more information on what is happening in the market.
Question 4 - Explain the other Suitable indicators that can be used with Line charts. (Demonstrate with screenshots)
There are a lot of amazing technical indicators that can be used with the line chart for a more in-depth and quality technical analysis on any cryptocurrency asset. Some of the suitable indicators that can be used with the line chart are moving average indicator and RSI indicator.
The moving average indicator is basically a technical indicator that average out and smooth out price information on the chart over a period of time. The moving average indicator can be used on any timeframe. The moving average indicator can be combined with the line chart to better understand the direction of the price and the strength of the trend.
Since the line chart is great to quickly determine the price direction or trend of the market, the moving average indicator is a great indicator to combine with the line chart. If the price line chart is above the moving average line and the moving average line serves as support for the price, it is a strong indication that the market is bullish and that the market is in an uptrend. Also, if the price line chart is below the moving average line, it is a strong indication that the market is bearish or the market is in a downtrend.
Line chart with the 200 period moving average indicator
The RSI indicator is basically a momentum technical indicator that is used to measures when the market is in overbought and oversold. With RSI values ranging from 0-100, when the price is below 30, it means the market is in oversold, and when the price is above 70, it means the market is in overbought. Since the RSI is a momentum indicator, it makes it a good indicator to combine with the line chart. A trader can make use of the both the line chart and RSI indicator to know when to buy or when to sell. If the price is increasing on the line chart and the RSI value is rising above 50, it could be a good signal to buy.
Line chart with the RSI indicator
Question 5 - Prove your Understanding of Bullish and Bearish Trading opportunities using Line charts. (Demonstrate with screenshots)
When it comes to trading any cryptocurrency asset, identifying trading opportunities is very important in ensuring maximum profit in the market. There are so many strategies that can be used for trading, however, it is important to identify the price direction so as to make the best trading decision. For this, I will be making use of the line chart with the MACD indicator to take advantage of the bullish and bearish trading opportunities.
Bullish trading using the Line chart with Alligator indicator and MACD
For the bullish trading, we can see that the lips of the alligator indicator has crossed above the teeth and the jaw, and the MACD confirmed this by the MACD line crossing above the signal line. The buy trading opportunity was identified as the MACD line stayed above the signal line as we can see on the screenshot
Bearish trading using the Line chart with Alligator indicator and MACD
For the bearish trading, we can see that the lips of the alligator indicator has crossed below the teeth and the jaw of the alligator indicator, and the MACD confirmed this by the MACD line crossing below the signal line. The sell trading opportunity was identified as the MACD line stayed below the signal line.
Question 6 - Investigate the Advantages and Disadvantages of Line charts according to your Knowledge
Advantages of line chart
- The line chart focuses more on simplicity and is easier to understand
- The line chart only makes use of the closing price, making is great for long term traders.
- Line chart provides better market insight for longer timeframes
- Line chart provides an easy way for traders to quickly identify support and resistance levels on the chart
- The line chart makes it easier to quickly identify the direction the market is going and overall trend in the market.
- Line chart helps to eliminate noise in the market as a result of price fluctuations and smoothens out price information by utilizing only the closing price.
- Line chart can be used in combination with technical indicators
Disadvantages
- Line chart provides less information on what is happening in the market in lower timeframes
- Line chart is less effective when it comes to short term trading or scalping
- Line chart focuses on only the closing price information and as a result, eliminates other valuable price information such as opening price, highs and lows price which is also important for trading
- Line chart doesn’t show signals like Gaps on the chart and also there isn’t any visual representation of whether the buyers or sellers are in control of the market
- Line charts doesn’t provide insights such as strengths of the buyers and sellers in the market
- Line chart doesn’t provide market patterns that is useful for identifying trading signals
Conclusion
Line chart remains one of the most popular and used charting tools as far as technical analysis is concerned. When it comes to trading, technical analysis is key and also price chart. A cryptocurrency chart is basically a graphical visual representation of what is happening in the market, in terms of price action over a period of time. At the moment, a line chart is one of the common types of charts that are available on various charting platforms such as tradingview. A line chart was developed to visually represent and simplify price information on any cryptocurrency asset over a time period. Line chart can be used on any timeframe, however, it has proven to work well for longer timeframes.