What is a Horizontal Line?
A horizontal line is a line drawn touching the support or resistance level on a price chart in technical analysis. Horizontal lines are commonly used for price breakouts and are deemed essential when analyzing trades.
In geometry analysis, a horizontal line is a straight line with a zero slope and perpendicular to the y-axis. It is also known as a constant function because all values on the line have the same y-values.
- A horizontal line is a line that is drawn on a price chart touching the support or resistance levels.
- Horizontal lines are used by traders during breakouts to make trading decisions when the market poses fewer risks.
- Horizontal lines are different from trend lines in that the former is flat while the latter includes angles.
Understanding Horizontal Lines
Horizontal lines are used in technical analysis to highlight price action. They are primarily used to draw special attention to support or resistance levels. In this case, the support level means the point where the stock price stops falling due to demand concentration or buying interest. On the other hand, a resistance level occurs when demand concentration triggers a downward trend.
Horizontal lines are drawn by connecting the same swing points. When a horizontal line is drawn by connecting it to similar swing highs, it is called a horizontal resistance line. Similarly, horizontal support lines are drawn by connecting swing lows.
Analysts and traders use horizontal lines to predetermine when the market is favorable. The stock price is considered range-bound when trend lines are within the support and horizontal resistance lines. However, a further price decline is indicated by the movement below the support horizontal line.
Similarly, movements below the resistance horizontal line signal higher prices. After reaching a horizontal resistance line, a decline in price means traders need to hold until the market price becomes favorable. If a data sample is used to draw a horizontal line to highlight series of lows and highs, a data point moving below or above the horizontal line will point to a decline and rise in the values of the x-axis.
Framework of Horizontal Analysis
Under the horizontal analysis, prices or values are compared with the values in other periods. Typically, the current year’s figures are compared with the base year and how the values change over time. Analysts use such an aspect to analyze a series of earning reports and financial statements from one year to another. The approach is a useful tool for representing the change element by looking at the shift using a specific base period and expressing it in percentages or dollars.
To calculate the percentage change in one horizontal analysis method, the first thing to do is to select the base year and comparison year. Next, calculate the dollar change by subtracting the base year’s value from that in the comparison year. The quotient is then multiplied by 100.
Horizontal analysis can be used to determine a change in revenue or trends over time. It is also used to compare financial positions or performance between companies.
Horizontal Line in Supply and Demand Curves
The vertical axis represents the price on a supply and demand curve, while the horizontal axis represents the quantity demanded. A perfectly horizontal line in a supply and demand curve shows that the quantity supplied or demanded demonstrates perfect elasticity or completely responds to price changes.
A change in the price above the market price results in quantity falling to zero. Perfect elasticity describes a market condition when consumers are unwilling to spend more than a specific price for goods or services.
Horizontal Line vs. Trend Line
While both horizontal and trend lines can mean the same thing, there is a difference when trading them. The primary difference lies in the angle because their difference can also be found in trading shallow, regular, and steep lines. A horizontal line is particularly flat and horizontal, while a trend line is angled when drawn on a chart.
Trend lines may also be in different forms, based on their angles. For example, the steep trend line is angled more than 40 degrees, and the price movement exhibits a lot of momentum. A regular trend line is angled between 10 degrees and 40 degrees, and the price movement is well balanced and weaker. The shallow trend line is angled between 0 and 10 degrees, and the price movement is generally weak.
Limitations of Using a Horizontal Line
A horizontal line is subjectively drawn by traders at different prices. Stock prices may be subjected to opposing pressure when a horizontal line is drawn at highly important levels. It is likely to cause confusion, and eventually, loss of trade by potential traders until a decisive move on prices suffices below or above the horizontal line.
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