One of the most important elements in technical analysis is the horizontal line. Mastering how to draw horizontal lines is an essential part of technical analysis.
In this article, we will explain the horizontal line, which is indispensable when trading, and how to draw it.
In addition, I will explain how to draw horizontal lines using the “push-low and return-high prices” that I explained in the previous article on Dow Theory, so if you have not read the previous article, please read that first.
Explanation What is the Dow Theory? Defining Trends and How to Switch Eyes
- Why draw a horizontal line?
- Let’s summarize a bit of what we’ve seen so far
- What is the “other horizontal line” that FX traders are interested in?
- On which time chart do you draw a horizontal line?
- When to draw a horizontal line & when to erase it?
- The important thing is to draw a horizontal line on the chart with your own hands
- Preview of next installment
Why draw a horizontal line?
To begin with, what is the “most important information” when conducting technical analysis (chart analysis) in Forex?
Please think about it for a moment.
What do you think? When you hear the answer, you may think, “Oh, that’s right”.
Yes, it is rate (price). It is sometimes called price, but in this article, I will use “rate” instead.
Rates move as forex traders buy and sell
Forex traders all over the world are both happy and sad at the rate changes in front of them.
“The dollar has crossed 120.00!” or “Will it break below 100 yen?” They are watching the rate’s ups and downs.
Then, many traders make a “buy entry” or close their sell positions and “buy back”, and the rate goes up.
Likewise, if a large number of traders “sell entry” or close out their buy positions, the rate will go down.
What is the point where everyone’s attention is focused?
What is the most notable point among these rate movements?
It is the point where the rate reversed last time. Let’s take a step-by-step look at the reasons for this.
First, let us assume that the rate has been rising rapidly.
This situation indicates that many traders continue to buy that currency pair and few sell.
Then came this.
The rate reversed at the red circle. Why did it reverse at the red circle?
It is because the power of traders buying at the rate above the red circle is weaker than the power of traders selling there.
In other words, it shows that “there were many traders selling at the red circle (a lot of money selling).
Let us illustrate this differently.
The red arrow represents buying power and the power (financial power) of traders who want to buy.
The blue arrow represents the power to sell, which is the financial power of traders who want to sell.
The point where the rate reverses is the point where the power to sell finally exceeds the power to buy.
In other words, there was a fierce battle between buyers and sellers at that point, and the rate reversed as a result of that battle.
The result of this battle was a price reversal, and above the reversed rate, there is a possibility that many more traders are waiting to sell.
And above the reversed rate, there is a line of stop-loss orders from traders who sold from the reversed position.
What if we reach the “reversed rate” again?
If so, what would happen if the “reversed rate” is reached again?
At the last reversed rate, the traders who were waiting there will join the sellers, and a fierce battle between buyers and sellers will once again take place.
Whether the rate will then rise or be pushed back down again is anyone’s guess.
However, there is no doubt that the “reversed rate” is the focus of many market participants.
This is because it is the point where many traders think
- Above that rate, there may be no traders willing to buy. So, won’t it reverse back down?
- If the rate goes above that rate, traders who are selling below that rate will lose money (i.e., more buy orders), and the rate will go up all at once, won’t it?
- I wanted to have a sell position myself at the rate at which the market reversed last time (I missed it), so I would definitely like to make a sell entry when the market comes back to that rate.
- I have a buy position now, but it doesn’t look like it will rise above that rate, so I want to close (sell) when it gets close to that rate.
- The price reversed and fell once, but it hasn’t fallen that far, so I think there are not many traders who want to sell. (I thought it was going to go above?)
Either way, there is a possibility that some kind of movement will occur at that rate, and that is why it is the focus of so many traders’ attention.
So, if the “reversed rate” is such a hot spot, then it is best to mark it, right?
Yes, that is the “horizontal line” (line).
Looking at this chart alone, it may appear that we have merely drawn horizontal lines at the highs.
However, if you understand what we have explained so far, you will realize the importance of “drawing horizontal lines at highs and lows,” which is the basis of technical analysis.
And, based on what has been explained up to this point, you will be able to draw another very important horizontal line.
Now, what kind of horizontal line is that? If you understood the previous article on Dow Theory, you should be able to guess.
Let’s summarize a bit of what we’ve seen so far
Before proceeding, let us summarize a bit of what we have seen so far.
Why Reversed Rates (Highs and Lows) are Noteworthy
- The point at which a rate reverses is the point at which the sellers and buyers fought hard, indicating that once the “side trying to reverse” won.
- When it approaches that rate again, it will again violently try to “reverse” the rate.
- If the rate fails to reverse and exits, the direction of the loss of the “side that wants to reverse” and the direction of the new entry of the “side that wants to break through” will coincide, which could result in a big move.
- Therefore, “reversed rates” are the focus of many forex traders.
This is why we focus on “highs and lows” in technical analysis.
By drawing horizontal lines (lines) there, it is possible to grasp the possibility that something might happen.
What is the “other horizontal line” that FX traders are interested in?
Now that we know why “reversed rates”-i.e., highs and lows-are of interest, we will continue with an explanation of rates that are particularly important among the “highs and lows.
In our previous article, we gave you the definition of a trend.
It was as follows.
Definition of Trend
- An uptrend is an upward trend if the high and low prices are rising.
- A downtrend is indicated when the high and low are falling.
Therefore, in the case of an uptrend, a break below the “low before the high” is the point at which the trend loses direction – the point at which traders begin to wonder if the uptrend is over.
This means that traders will be very interested in whether or not the rate will break below the “low before the high” – in other words, the “push low“.
Therefore, the horizontal line drawn at the push low and the return high is another very important horizontal line.
Look at the highs and lows, and if the chart fits the definition of a trend, draw firm horizontal lines at the push lows and return highs as well.
On which time chart do you draw a horizontal line?
As we have seen, the horizontal lines drawn in technical analysis are “highs and lows” and “push lows and return highs.
When actually drawing horizontal lines on a chart, one problem arises.
That is, on which time axis should the horizontal line be drawn?
There are highs and lows on all time charts, including the 1-minute, 5-minute, 15-minute, 1-hour, and 4-hour time frames. If we were to draw horizontal lines on all of them, the chart would be filled with horizontal lines.
So, on which time chart should we draw horizontal lines?
The bigger the time frame, the more information about the many battles
Let’s review candlesticks for a moment.
How long does it take for a “single candlestick” displayed on an hourly chart to be determined (completed)?
The answer is – one hour.
Candlesticks on an hourly chart increase by one candlestick per hour. Similarly, on a 5-minute chart, one candlestick is created every 5 minutes.
In other words, each candlestick contains information about the buying and selling that took place during that hour.
In the case of an hourly candlestick, one hour’s worth of trading results of FX traders around the world is contained in a single candlestick. The resulting candlesticks form a series of highs and lows on the chart.
For example, the highs and lows on the daily chart are made up of many, many candles that are filled with information from a 24-hour battle.
In other words, the highs and lows on the daily chart are the result of a long battle between many traders.
Therefore, it is clear from the fire that the daily highs and lows attract the attention of many forex traders, while the highs and lows on the 5-minute chart attract much less attention.
Prioritize large hourly charts in forex and draw a horizontal line
In technical analysis, the answer to the question “on which time chart should I draw horizontal lines?” is that priority should be given to the larger time charts.
Specifically, for day trading, the basic rule is to draw a horizontal line on the daily, 4-hour, and even 1-hour time frames. For swing trading, horizontal lines should also be drawn on the weekly leg.
Then, using these horizontal lines as the basis for decision making, a trading strategy is formulated as to how to trade.
For day trading in Forex, in addition to drawing horizontal lines on the daily to hourly timeframe, it is recommended to check the weekly chart at the beginning of the day’s trading to see if the weekly highs and lows are getting closer to each other.
Normally, it is not often that we approach the highs and lows on the weekly chart.
But that is why the situation of approaching weekly highs and lows is something that many forex traders look out for, and it also means that a big move (turbulence or disruption) is likely to occur.
When to draw a horizontal line & when to erase it?
The point of interest in the rate movement was the “reversal point”.
The reason is that at that point, in the past, we would have said, “I can’t let it go any further! I’m going to reverse it! The reason is that at that point in the past, opposing forces appeared and fought a fierce battle between buyers and sellers, which resulted in a successful reversal.
The traces of this battle are shown on the chart in the form of “highs and lows.
If the rate reaches that point again, there is a possibility of another battle and some kind of price movement.
That is why we draw a horizontal line there to keep an eye on it.
So now you know that the horizontal lines are drawn at the “high and low” and the “push low and return high.
The next question is when to draw or remove the horizontal line.
From here, we will explain the basic timing for drawing and erasing horizontal lines.
Draw horizontal lines on the chart along the rate movement
Now let us draw a horizontal line along the actual trend.
In the figure below, we assume that the trend is already upward.
First, look at the chart and draw a horizontal line at the high that “everyone can see has reversed.
Now you may still find it difficult to draw a line with your own confidence, but you will gradually get used to this, so the first step is to practice.
The trick is to draw a horizontal line where “everyone sees it”.
It is important to imagine what other forex traders think, rather than what “you” think.
Now, let’s move on.
Now, the rate has broken above the horizontal line (line) that was just drawn.
The price has made a new high (the high price has rounded up) and the uptrend is continuing.
Then, we draw a horizontal line at the “previous low” – that is, the “push low”.
The rate has clearly reversed again and made a higher high, so we draw a horizontal line at that high.
In the figure above, the rate that has reversed has repeatedly passed above and below the horizontal line that was first drawn.
When this happens, we decide to erase that horizontal line because it “may have lost everyone’s attention.
Then it made another high (again a rounding up of the highs).
So we draw a push-low horizontal line at the lowest price between the previous high and the previous low.
In this way, horizontal lines (lines) are drawn and erased.
Basically, we draw horizontal lines while thinking in this way, but in reality, there are various cases and we are often at a loss to make a decision.
However, a situation in which one is unsure of one’s decision also means that “other FX traders are also unsure,” so the fact that “everyone is unsure” itself can be important information.
Also, there are “strong horizontal lines” and “weak horizontal lines” depending on the horizontal line, and these judgments are also important factors in creating a trading strategy.
In addition, there are cases where a horizontal line that serves as the neckline of a double bottom or double top will be recognized again in the future, even if it has been broken out once.
These details will be covered in another article.
The important thing is to draw a horizontal line on the chart with your own hands
The above has been an explanation of horizontal lines and how to draw them, which is an important function in technical analysis.
By now, you should be able to draw horizontal lines on a chart.
The important thing is to actually try drawing the horizontal line on the chart by yourself.
And do it over and over again.
The key to improving your forex trading is to practice repeatedly with your own hands.
Don’t think too hard, simply draw a horizontal line by yourself
As one would expect, it is not something that can be learned perfectly just by reading, so just as in sports, it is important to repeat the process of throwing a ball or swinging a bat over and over again.
As you do so, you may find yourself saying, “Huh? What should I do in this case? ……” and you will have your own questions.
For example, in this case, you may have already asked yourself, “How do I draw a horizontal line when the rate is within the high-low range of the range?”.
Actually, the basics are the same in a range.
You can simply follow this basic rule: the highs and lows that most forex traders seem to be paying attention to.
The above is a thorough explanation of how to draw horizontal lines on a chart, what they mean, and how to draw lines.
Preview of next installment
Following the “Meaning of Horizontal Lines and How to Draw Them” in this issue, we will tell you about the “Role of Horizontal Lines (Lines)” in the next issue.
The horizontal line you drew is called a “support line” or “resistance line,” depending on the situation. I will tell you more about the meaning, role, and usage of these lines in the next article.
Please click on the link below.
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