THREE LINE BREAK
Overview
Three Line Break charts display a series of vertical boxes
("lines") that are based on changes in prices. As with Kagi, Point & Figure,
and Renko charts, Three Line Break charts ignore the passage of time.
The Three Line Break charting method is so-named because of
the number of lines typically used.
Three Line Break charts were first brought to the United
States by Steven Nison when he published the book, Beyond Candlesticks.
Interpretation
The following are the basic trading rules for a three-line
break chart:
- Buy when a white line emerges after three adjacent black
lines (a "white turnaround line").
- Sell when a black line appears after three adjacent white
lines (a "black turnaround line").
- Avoid trading in "trendless" markets where the lines
alternate between black and white.
An advantage of Three Line Break charts is that there is no
arbitrary fixed reversal amount. It is the price action which gives the
indication of a reversal. The disadvantage of Three Line Break charts is that
the signals are generated after the new trend is well under way. However, many
traders are willing to accept the late signals in exchange for calling major
trends.
You can adjust the sensitivity of the reversal criteria by
changing the number of lines in the break. For example, short-term traders might
use two-line breaks to get more reversals while a longer-term investor might use
four-line or even 10-line breaks to reduce the number of reversals. The Three
Line Break is the most popular in Japan.
Steven Nison recommends using Three Line Break charts in
conjunction with candlestick charts. He suggests using the Three Line Break
chart to determine the prevailing trend and then using candlestick patterns to
time your individual trades.
Example
The following illustration shows a Three Line Break and a bar
chart of Apple Computer.
You can see that the number of break lines in a given month
depend on the price change during the month. For example, June has many lines
because the prices changed significantly whereas November only has two lines
because prices were relatively flat.
Calculation
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 is drawn.
- If the price falls below the previous line's low price, a
new black line is drawn.
- If the price does not rise above nor fall below the
previous line, nothing is drawn.
In a Three Line Break chart, if rallies are strong enough to
display three consecutive lines of the same color, then prices must reverse by
the extreme price of the last three lines in order to create a new line:
- If a rally is powerful enough to form three consecutive
white lines, then prices must fall below the lowest point of the last three
white lines before a new black line is drawn.
- If a sell-off is powerful enough to form three consecutive
black lines, then prices must rise above the highest point of the last three
black lines before a new white line is drawn.