Horizontal Levels are Better Than Trend Lines

In technical analysis, this might be the age-old debate. What’s better? Horizontal levels or diagonal trend lines? Understanding each of the methods really highlights why there is a true winner between the two.

Horizontal Levels

Let’s start with horizontal levels. These are simply price points where a lot of trading has happened in the past. They show us where buyers and sellers have battled and one side has come out victorious. We would know successful buy points as “support / demand” and successful sell points as “resistance / supply.”

The horizontal levels form because actual trades have been entered in the market. If we know trades have gone through in these areas, and it’s reasonable to assume people have a vested interest in being above or below a particular level, it’s fair to assume that the market may be more reactive to a level. The whole premise of technical analysis is understanding that the past decisions of some traders may inform the future decisions of some traders.

The point of horizontal levels is that we know traders have something to gain or lose at a specific price point.

Trend Lines

Trend lines, on the other hand, try to predict where prices are going based on the speed of past movements. While they can be useful to help identify trends, they rely a lot on personal judgment and can vary depending on who’s drawing them. Which high or low do you start at? How many touches do you aim for? What if the best fit has a few different deviations? As a trend line moves into the future, it’s a projection of what we think the market might do and not actually representative of held positions.

Because traders don’t necessarily have something to gain or lose over or under a trend line, they are less representative of where inflection points can be found in the market. Knowing when a trend is weakening is important, but we can not say with as much confidence that the buyers or sellers involved in a position are above or below water on their specific trade.

So although trend lines have their place, and can help add context to any given move, they are speculative in terms of their future “predictive” power. Horizontal levels emerge as a more reliable way to navigate technical charts and understand where buyers and sellers have specific monetary interest in reactions at price.