The most underestimated drawing tool. Horizontal line explained.


horizon, horizontal lineThere are many technical analysis tools. Some are more complex than others. But more complicated does not mean better. The simplest tools such as a horizontal line are no less important.

A horizontal line explained

Viewed in a geometrical way, a horizontal line runs parallel to the x-axis which means that all values on the line have the identical y value.

Horizontal line Olymp Trade
A horizontal line can be found in drawing indicators on the Olymp Trade platform

In technical analysis, a horizontal line connects similar swing lows in price or swing highs.

It is oftentimes used to mark the levels of support and resistance on the price chart. The support line will be created by joining similar swing lows and the resistance by connecting swing highs. The horizontal support and resistance levels are very important for traders. When the price is fluctuating between them, we say the market is ranging. After some time, one of the boundaries will be broken and the rise or decline in the prices will be expected.

price level respected by the price
After inserting a horizontal line it is easy to find a price level respected by the price

Using horizontal lines in fundamental analysis

In fundamental analysis, various statements and reports about the earnings in a specific period of time are compared. Horizontal analysis helps to find comparisons of prices and values over time. It can be applied to any aspect of financial statistics of the company as well as comparisons between different corporations.

A specific base period is determined and then the changes from that base are estimated. The degree of change can be calculated in dollars and percentages. The percentage change is received when you divide the change in dollars between the base year and the comparison year by the value of the position in the base year and then you multiply that by 100. For instance, a statement that in the past quarter incomes increased by 15% uses horizontal analysis.

Indication of supply and demand

When you look at a graph of supply and demand, the vertical axis represents the price and the horizontal axis a demanded quantity. When supply and demand curves have a form of a horizontal line, it means a product or service is perfectly elastic and its demand responds immediately to shifts in prices. When the price of this item rises beyond the market price, the quantity of demands descends to zero. Consumers do not wish to pay more money for this good.

Supply, demand and price
Supply, demand and price

Using the horizontal line in technical analysis

As I have mentioned before, the horizontal line is widely used in technical analysis. Yet, it provides significant information. Let’s take a look at the exemplary EURUSD chart below.

Horizontal line as a price support
Horizontal line as a price support

There is a horizontal line drawn. It acts as the support level. When the price breaks through it forming a new low, you can expect the downtrend is coming. In the case the price rises above the horizontal line again, you may assume the downtrend failed and the price may rise even more.

Summary

A horizontal line is a drawing tool used frequently by traders. It joins highs or lows indicating resistance or support levels. It may be of great help in technical analysis and predicting future price movements.

The distinction that exists between a horizontal line and a trendline is that the first one is particularly horizontal. The trendline also connects highs or lows on the price chart but is normally inclined in line with the movement of prices.

I recommend opening a free Olymp Trade demo account. You can practice drawing and using horizontal lines in trading without worrying about your money. The demo account is supplied with virtual cash that can be refilled at any time.

Practice and learn!

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