In geometric analysis, a horizontal line proceeds parallel to the x-axis. Put another way, on a perfectly horizontal line, all values on the line will have the same y-value.
Key Takeaways
A horizontal line is commonly used in technical analysis to mark areas of support or resistance.
A horizontal line runs parallel to the x-axis.
In technical analysis, the horizontal line is typically drawn along a swing high, or a series of them, where each high in the series stopped at a similar level. The same concept applies to swing lows.
Understanding a Horizontal Line
Horizontal lines are commonly used in technical analysis to highlight areas of support, where the price stopped falling and then bounced on prior occasions, or resistance, which is where the price stopped rising and then proceeded to fall on prior occasions.
The horizontal line is drawn by connecting similar swing lows in price to create a horizontal support line. For a horizontal resistance line, similar swing highs are connected.
The horizontal line is then used for analytical or trading purposes. For example, if the price of an asset is moving between support and resistance horizontal lines then the price is considered to be range-bound.
A move below the support horizontal line could indicate a further price decline, but if support holds and the price bounces higher then prices could be forthcoming. The same concepts apply to a resistance horizontal line. If the price moves above resistance, higher prices could be forthcoming. If the price reaches resistance and then starts to decline, the horizontal line has held and traders will watch for lower prices.
In more simple terms, a horizontal line on any chart is where the y-axis values are equal. If it has been drawn to show a series of highs in the data, a data point moving above the horizontal line would indicate a rise in the y-axis value over recent values in the data sample.
Fundamental Horizontal Analysis
Horizontal analysis is used to compare values or prices over time. This is an aspect of fundamental analysis in which an analyst will compare various earnings reports and statements over time. In this kind of analysis, time functions as the horizontal x-axis and allows analysts to calculate percentage changes over time, a useful tool for representing the degree of change.
Horizontal analysis looks at the trend of financial statements over multiple periods, using a specified base period, and typically shows the changes from the base period in dollars and percentages.
The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the item value in the base year, then multiplying the quotient by 100. For example, when you hear someone saying that revenues increased by 10% this past quarter, that person is using horizontal analysis.
Horizontal analysis can be used on any item in a company’s financials, from revenues to earnings per share (EPS), and is useful when comparing the performance of various companies.
A Horizontal Line as it Relates to Supply and Demand Curves
Supply and demand curves are drawn with price on the vertical axis of the graph and quantity demanded on the horizontal axis. When looking at supply and demand curves, a perfectly horizontal line indicates that an item has perfect elasticity, or that its demand is immediately responsive to changes in price. When the price of a perfectly elastic good or service increases above the market price, the quantity demanded falls to zero. With perfect elasticity, consumers simply are not willing to spend more than a specific price for a good or service.
Example of How to Use the Horizontal Line in Technical Analysis
Drawing a horizontal line is one of the simplest forms of technical analysis, but it also provides important information. On the chart below, a horizontal line is drawn on the SPDR S&P 500 (SPY) exchange traded fund (ETF).
An uptrend is when a price makes higher swing highs and higher swing lows. Therefore, a horizontal line can highlight when price is making a new high, in this case, thus showing signs of an uptrend. On the SPY chart above, the price is moving above the horizontal line indicating an uptrend. If the price falls back below the horizontal line, it could warn that uptrend has failed and lower prices may be forthcoming.
In this sense, the horizontal line acts like a line in the sand, where moving above the line is bullish.
The Difference Between a Horizontal Line and a Trendline
Both these terms could refer to the same thing: drawn lines on a chart. While a horizontal line is specifically horizontal, a trendline is typically angled and drawn along rising swing lows during a price uptrend or drawn along dropping swing highs during a downtrend.
Limitations of Using a Horizontal Line in Technical Analysis
A horizontal line is not an actual barrier for price. It is a technical tool which may help traders determine whether they should be more bearish or bullish.
Where a horizontal line is drawn is subjective. Not all traders may place the horizontal line at the same price.
At highly important prices, where a horizontal line may be drawn, it is possible the price will whipsaw around it. This could cause confusion or some potential losing trades until the price makes a more decisive move above or below the line.
The term price channel refers to a signal that appears on a chart when a security’s price becomes bounded between two parallel lines. The price channel may be termed horizontal, ascending, or descending depending on the direction of the trend. Price channels are often used by traders who practice the art of technical analysis to gauge the momentum and direction of a security’s price action and to identify trading channels.
Key Takeaways
A price channel occurs when a security’s price oscillates between two parallel lines that are either horizontal, ascending, or descending.
The channel is formed when a security’s price is buffeted by supply and demand.
Price channels are quite useful in identifying breakouts, which is when a security’s price breaches either the upper or lower channel trendline.
Traders can sell when the price approaches the price channel’s upper trendline and buy when it tests the lower trendline.
Maximize your gains when the security follows a delineated price channel path by using long and short positions.
Understanding a Price Channel
A price channel forms when a security’s price is buffeted by the forces of supply and demand. This movement can be upward, downward, or sideways trending. These forces affect the price of a security and can cause it to create a prolonged price channel. The dominance of one force determines the price channel’s trending direction. Price channels can occur over various time frames.
Traders are always on the lookout for chart patterns that can aid them in their trading decisions. This is especially true for individuals who are disciples of technical analysis. Once a security’s price action carves out a set of highs and lows that follow a discernible pattern and can be connected by two parallel lines, a price channel has been formed. You can see this visualized in the chart below.
The lower trendline is drawn when the price pivots higher while the upper trendline is drawn when the price pivots lower. The steepness of inclines and declines determine the direction of the price channel’s trend. An upward or ascending price channel is bounded by trendlines with a positive slope. It indicates that the price is trending higher with each price change.
Likewise, a downward, or descending price channel has trendlines with a negative slope. This indicates that the price trends lower with each price change. The two lines of a price channel represent support and resistance. Support and resistance lines can provide signals for profitable investment trades.
Special Considerations
Price channels are quite useful in identifying breakouts, which is when a security’s price breaches either the upper or lower channel trendline. Traders can also trade within the channel. This means selling the security when the price approaches the channel’s upper trendline and buying when it tests the channel’s lower trendline.
Price channels can be created by all types of vehicles, instruments, and securities. They include futures, stocks, mutual funds, and exchange-traded funds (ETFs) among others.
Price Channel Analysis
There are a few ways to benefit from correctly identifying price channels. The best chance to maximize your gains happens when the security follows a delineated price channel path by using both long and short positions. Furthermore, consider the following:
During an uptrend: A bullish investor may want to keep their holdings at the upward bound in anticipation of a breakout, which would lead to a surge in price. Investors may want to consider selling the asset or taking a short position when it hits the upper trendline as long as it looks like the security will remain within the price channel.
During a downtrend: Investors may want to short the stock at the upper bound and take an even deeper short position they confirm a breakout. If an investor expects the price action to stay within the boundaries of the price channel, they could go against the trend and take a long position to maximize their profits.
A line graph—also known as a line plot or a line chart—is a graph that uses lines to connect individual data points. A line graph displays quantitative values over a specified time interval. In finance, line graphs are commonly used to depict the historical price action of an asset or security.
Line graphs can be compared with other visualizations of data including bar charts, pie charts, and (in trading) candlestick charts, among others.
Key Takeaways
A line graph connects individual data points that, typically, display quantitative values over a specified time interval.
Line graphs consist of two axes: x-axis (horizontal) and y-axis (vertical), graphically denoted as (x,y).
In investing, in the field of technical analysis, line graphs are quite informative in allowing the user to visualize trends.
While line graphs are used across many different fields for different purposes, their most common function is to create a graphical depiction of changes in values over time.
In finance, line graphs are used to create visual representations of values over time, including changes in the prices of securities.
Understanding Line Graphs
Line graphs use data point “markers,” which are connected by straight lines. These data points, connected by straight lines, aid in visualization. While line graphs are used across many different fields for different purposes, they are especially helpful when it is necessary to create a graphical depiction of changes in values over time.
Line graphs are often used in finance to create visual representations of values over time, including changes in the prices of securities, company revenue sheets, and histories of major stock indexes. They are also useful for comparing different securities. In investing, specifically with respect to the field of technical analysis, line graphs are used by investors to visualize trends, which can greatly aid them in their analyses.
There are some limitations to line graphs. For example, line graphs often lose clarity when there are too many data points. It is also easy to manipulate them visually in order to achieve certain effects. For example, the apparent degree of change can be visually manipulated by adjusting the range of data points on the axes.
Line graphs can be constructed manually or by using software such as Microsoft Excel. The latter greatly improves the speed and accuracy of the end product.
Constructing a Line Graph
Line graphs consist of two axes: x-axis (horizontal) and y-axis (vertical). Each axis represents a different data type, and the points at which they intersect is (0,0). The x-axis is the independent axis because its values are not dependent on anything measured. The y-axis is the dependent axis because its values depend on the x-axis’s values.
Each axis should be labeled according to the data measured along that axis. Then, each axis should be divided in appropriate increments (e.g., day one, day two, etc.). For example, if measuring the changes in a stock’s prices for the previous two weeks, the x-axis would represent the time measured (trading days within the period), and the y-axis would represent stock prices.
When using line graphs to track the price of a stock, the data point most commonly used is the closing price of the stock.
For example, assume that on day one of trading, a given stock’s price was $30, resulting in a data point at (1, $30). On day two of trading, the stock’s price was $35, resulting in a data point at (2, $35).
Each data point is plotted and connected by a line that visually shows the changes in the values over time. If the value of the stock increased daily, the line would slope upward and to the right. Conversely, if the price of the stock was steadily decreasing, then the line would slope downward and to the right.
Types of Line Graphs
There are three main types of line graphs. Although each type is fundamentally rooted in the same principles, each has its own unique situation where it is best to implement and use.
Simple Line Graph
A simple line graph is the most basic type of line graph. In this graph, only one dependent variable is tracked, so there is only a single line connecting all data points on the graph. All points on the graph relate to the same item, and the only purpose of the graph is to track the changes of that variable over time. This graph cannot be used to compare the variable to another variable because only variable is charted.
In the example below, the x-axis is time and the y-axis is the year-over-year change in price for all consumer goods in the United States. This graph of the Consumer Price Index shows the annual rate of inflation and, since it is analyzing just one set of data (all items), there is only one line.
Consumer Price Index, All Items.
Bureau of Labor Statistics
Multiple Line Graph
In a multiple line graph, more than one dependent variable is charted on the graph and compared over a single independent variable (often time). Different dependent variables are often given different colored lines to distinguish between each data set. Each line relates to only the points in its given data set; lines do not cross between dependent variables.
For example, the line graph below shows the Consumer Price Index again. However, this graph shows the change in price for three different categories: medical care (red), commodities (green), and shelter (blue). In this graph, we can see the growth in price for commodities was higher than the other two categories in July 2022. However, shelter or medical expenses were typically the groups that experienced higher inflation over the past decade.
Consumer Price Index, Select Categories.
Bureau of Labor Statistics
Compound Line Graph
A compound line graph uses multiple variables similar to a multiple line graph. However, the variables are often stacked on top of each other to show the total quantity across all variables. This not only informs users of the relationship between each of the variables, but it informs of how the total changes as well.
In the example below from the Environmental Protection Agency (EPA), there are five dependent variables that range from abnormally dry land areas to exceptional drought areas. The most extreme drought data was graphed first, and any empty space under that line graph was shaded dark red. Then, subsequent sets of data were plotted after, with the empty area below each of those lines shaded their respective colors. In total, this shows the relationship between drought descriptions as well as the total percent of U.S. land area in these categories by year.
EPA Drought Measurements, 2000-2015.
EPA
Parts of a Line Graph
Line graphs may vary depending optional features or formatting. The highest-quality, easiest to understand line graphs have the following characteristics:
Title
Line graphs may have a title above the graph to succinctly explain what the graph is depicting. Unless you provide a user with written context, the user will often rely on the title to better understand what data is being pulled in. The title may specifically call out a timeframe or limits to the data (i.e. an appropriate title for the compound line graph could be ‘Level of U.S. Dry Land By Year, 2000-2015’).
Legend
The legend explains what each dependent variable is and how to distinguish different sets of data. In the example above, each dependent variable is marked with its own color. The box that explains what each color means is the legend.
Data
Each item of data on a line graph is a reference to a different source that ties the dependent variable to an independent variable. This is the information on your graph; it is the item that creates the dots that get connected to form the lines on your chart. In some examples as seen above, there may be multiple sets of data combined into a single graph. To ensure data is protected and accurate, companies may have specific data integrity analyst or similar positions to monitor database activity.
X-Axis
The x-axis is the set of information that runs along the horizontal, flat portion at the bottom of the line graph. In most line graphs, the x-axis will be related to time, whether it is the different months in a year or the number of weeks that have passed since a product launch.
Y-Axis
The y-axis is the set of information that runs along the vertical, left-side of the graph. Some iterations of line graphs have this set of information on the right. In any case, these numbers count the items being measured. The graph may start at zero, though there are instances where it makes more sense to start at a higher number.
Line
Last, we have the line. The line connects all data points within a single dependent variable. This line’s movement shows the increase and decrease of information across time. It can also easily be compared against other lines as long as all data sets are being measured over similar periods of time. Though overly simplified, this line can communicate to management what actions should be taken to improve operations or strategic planning.
Want to display multiple sets of data but one set of information is more suitable as a bar chart? Programs such as Excel and Google Sheets can produce combined charts where one dependent variable is shown as a bar graph and another dependent variable is shown as an overlying line graph.
Creating a Line Graph in Excel
You can use a line graph in Excel to display trends over time. In Excel, line graphs are appropriate if you have text labels, dates, or a few numeric labels on the horizontal axis (x-axis). Here are the steps to create a line graph in Excel. (If you are using numeric labels, empty cell A1 before you create the line graph):
Enter your desired column headers in Row 1. These columns will describe the different sets of data (i.e. in the example below, the headers differentiate data by animal).
Enter your x-axis value in Column A. In the example below, the data is broken up by year, so the years 2017 through 2022 are listed in the first column.
Enter your data. For each cell that corresponds to a header and year, enter a relevant figure. If no data exists, enter ‘0’.
After inputting in your values, select the range (whatever range encompassing those values). If you want your graph to include headers and labels, select the first row and first column For example, selecting A1:D7, the x-axis can be labeled as ‘Years’ and the y-axis can be labeled as ‘Count of Animals’.
On the Insert tab, in the Charts group, click the Line symbol (“Insert Line Chart”).
Click “Line with Markers”. This will create a line graph similar to the one below where each data point is marked with a larger point and these points are connected with a thinner line. Many of these formatting items can be adjusted.
Excel Line Graph Example.
Uses of a Line Graph
Different data visualization tools are best used for specific purposes, and a line graph is no exception. Depending on the underlying data, a line graph is best for:
Tracking changes over time. A line graph is usually formatted with the time periods on the x-axis and the quantity of occurrence on y-axis. Each period was a year, but line charges can be broken into days, weeks, months, or other quantities of time (i.e. days since a new CEO was hired).
Tracking smaller changes. The range displayed on a graph can be changed to better zoom into data that may not vary too widely. Compared to other types of charts, a line graph can be formatted to have very small increments on the y-axis that make is more clear how tiny changes across time have occurred.
Comparing changes across more than one group. In the example above, it is very easy to compare the quantity of three different types of costs in a single visual. As each line is represented by a different color, multiple types or groups of data can be tracked at the same time and compared against each other seamlessly.
Continuous sets of data. Because a line graph relies on a single strain of unbroken data, at least one variable of a line graph should be continuous. In most cases, this variable is time. A non-continuous data set (i.e. the number of animals at the 10 largest zoos in the world) would not be appropriate as there is no reason to link each data point with a line; a bar chart would be more appropriate.
What Is a Line Graph Used for?
Line graphs are used to track changes over different periods of time. Line graphs can also be used as a tool for comparison: to compare changes over the same period of time for more than one group.
How Is a Line Graph Useful in Finance?
Line graphs are useful in finance because they are very effective at creating visual representations of trends over time. For this reason, they are often used to depict how a stock is performing over a specific period of time.
What Are the 3 Types of Line Graphs?
A line graph may be a simple line graph, multiple line graph, or compound line graph. Each type of graph has a varying degree of dependent variables and how the user wishes to display the relationship between these variables.
What Are the Parts of a Line Graph?
Line graphs can be highly customizable in terms of title, labels, markers, style of line, and other non-essential features. However, all line graphs must have an x-axis (independent variable), a y-axis (quantity of dependent variable), and input data (dependent variables). The data points for each dependent variable are marked on the graph are connected by a line.
The Bottom Line
When analyzing data over time, one of the best graphical depictions of data is the line graph . A line graph often uses time as its x-axis and a numerical quantity on its y-axis. When data points are marked on the chart, all data points within a single dependent variable are connected with a line, making it very useful tool for analyzing changes over time for one or more variables.
An offset involves assuming an opposite position in relation to an original opening position in the securities markets. For example, if you are long 100 shares of XYZ, selling 100 shares of XYZ would be the offsetting position. An offsetting position can also be generated through hedging instruments, such as futures or options.
In the derivatives markets, to offset a futures position a trader enters an equivalent but opposite transaction that eliminates the delivery obligation of the physical underlying. The goal of offsetting is to reduce an investor’s net position in an investment to zero so that no further gains or losses are experienced from that position.
In business, an offset can refer to the case where losses generated by one business unit are made up for by gains in another. Similarly, firms may also use the term in reference to enterprise risk management (ERM), where risks exposed in one business unit are offset by opposite risks in another. For instance, one unit may have risk exposure to a declining Swiss franc, while another may benefit from a declining franc.
Basics of an Offset
Offsetting can be used in a variety of transactions to remove or limit liabilities. In accounting, an entry can be offset by an equal but opposite entry that nullifies the original entry. In banking, the right to offset provides financial institutions with the ability to cease debtor assets in the case of delinquency or the ability to request a garnishment to recoup funds owed. For investors involved in a futures contract, an offsetting position eliminates the need to receive a physical delivery of the underlying asset or commodity by selling the associated goods to another party.
Businesses may choose to offset losses in one business area by reallocating the gains from another. This allows the profitability of one activity to support the other activity. If a business is successful in the smartphone market and decides it wants to produce a tablet as a new product line, gains experienced through the smartphone sales may help offset any losses associated with expanding into a new arena.
In 2016, BlackBerry Ltd. experienced significant losses in its mobility solutions and service access fees. The associated declines were offset by gains in the areas of software and other service offerings, lessening the overall impact to BlackBerry’s bottom line.
Offsetting in Derivatives Contracts
Investors offset futures contracts and other investment positions to remove themselves from any associated liabilities. Almost all futures positions are offset before the terms of the futures contract are realized. Even though most positions are offset near the delivery term, the benefits of the futures contract as a hedging mechanism are still realized.
The purpose of offsetting a futures contract on a commodity, for most investors, is to avoid having to physically receive the goods associated with the contract. A futures contract is an agreement to purchase a particular commodity at a specific price on a future date. If a contract is held until the agreed-upon date, the investor could become responsible for accepting the physical delivery of the commodity in question.
In options markets, traders often look to offset certain risk exposures, sometimes referred to as their “Greeks.” For instance, if an options book is exposed to declines in implied volatility (long vega), a trader may sell related options in order to offset that exposure. Likewise, if an options position is exposed to directional risk, a trader may buy or sell the underlying security to become delta neutral. Dynamic hedging (or delta-gamma hedging) is a strategy employed by derivatives traders to maintain offsetting positions throughout their books on a regular basis.
Key Takeaways
In an offsetting position, a trader takes an equivalent but opposite position to reduce the net position to zero. The purpose of taking an offsetting position is to limit or eliminate liabilities.
Offsetting is common as a strategy across equities and derivatives contracts.
Example of Offsetting Positions
If the initial investment was a purchase, a sale is made to neutralize the position; to offset an initial sale, a purchase is made to neutralize the position.
With futures related to stocks, investors may use hedging to assume an opposing position to manage the risk associated with the futures contract. For example, if you wanted to offset a long position in a stock, you could short sell an identical number of shares.
