Three Line Break Charts

 
Introduction and Advantages
As opposed to Analytical charts, Three Line Break charts ignore the passage of time. They specialize in trend analysis, which is similar to P&F charting. Their main advantage is that there is no arbitrary fixed reversal amount, it is the market's action that will give the indication of a reversal.

Display
The Three-Line Break chart looks like a series of black and white boxes of varying heights (Although in ChartFX FE you can assign different colors to the boxes). A new block is in a separate column. Each of these blocks is called a line. Using the closing price, a new white box is added if the previous high is exceeded and a new black line is drawn if the price reaches a new low. If there is neither a new high nor a low, nothing is drawn.
If a rally is powerful enough to form three consecutive white lines, then the low of the last three white lines has to be exceeded before the opposite color line is drawn. The term "Three line Break" comes from the fact that the market has to "break" above the prior three lines before a new opposite color line is drawn.

Important Bibliography: Of all the text books that described Japanese Charting techniques. We found the best to be:

  • "Beyond Candlesticks", written by Steve Nison. John Wiley Sons, Inc., New York, NY, 1994

We strongly encourage the use and reading of this book as it fully describes Japanese Charting techniques with pattern analysis and illustrative examples.

A Three Line Break chart is depicted in the following figure:

TLB.gif (11574 bytes)

Construction
Three-Line Break charts are always based on closing prices.The general rules for calculating a Line Break chart are:

  • If the price exceeds the previous line's high price, a new white line (box) is drawn.
  • If the price falls below the previous line's low price, a new black line (box) is drawn.
  • If the price does not rise above nor fall below the previous line, nothing is drawn.

There are other rules and considerations when building Three-Line break charts. If you want to know the specifics, We strongly encourage you to obtain a copy of "Beyond Candlesticks", written by Steve Nison. John Wiley Sons, Inc., New York, NY, 1994. ISBN 0-471-00720-X