Horizontal levels are levels of support and resistance that help traders determine when a trend is likely to change. By analysing these levels and getting a better sense of when a trend will change, technical analysts can predict a currency's future price movements and make better-informed decisions.
Breaking Down Horizontal Levels
While there are many techniques that investors can leverage in forex trading, horizontal levels represent one of the more straightforward approaches. Traders can identify these levels by looking at charts and observing when a currency either failed to surpass a certain price level or was unable to fall below a specific price.
When a trader identifies horizontal levels for a currency, it provides them with a handful of scenarios and corresponding opportunities.
One potential scenario is that the currency might fluctuate between the horizontal levels. When the currency's rises to a resistance level, traders may step in and take profits, pushing the price lower. Alternatively, a movement too far in the opposite direction could motivate traders to step in and buy the currency, therefore placing upward pressure on prices.
While fluctuating in a range like this would prevent the currency from forming a new trend in the short term, it would also create opportunities for traders to generate gains.
Another scenario is that a currency's price could break through a level of resistance, and then fall back after enjoying some gains. At this point, the price that originally served as a level of resistance would form a support level. By being aware of this new support level, a trader could have a better chance of knowing the best time to enter a position or place a stop loss.
Instead of surpassing resistance, a currency's price could fall below support, extend losses and then recover. At this point, the old support level would serve as a new resistance level.
More Advanced Techniques
Horizontal levels are a straightforward, helpful strategy. However, using them alone may not be particularly helpful. Instead, traders can combine horizontal levels with other information gleaned from reading charts.
One helpful resource traders can leverage is swing points, which are points that represent where a trend changes. By drawing horizontal levels at these points, a trader can attempt to single out prices where a currency will likely change in trend. Currencies frequently encounter the same swing points repeatedly, so by charting these, a trader can more accurately attempt to predict where a currency will move. These levels can prove particularly helpful in range-bound markets where a currency's price fluctuates within a certain range
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Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…