Line-Break and 3-Line Break Charts
A Line-Break chart is a Japanese chart style similar to a Renko or to a Points-and-Figure (P&F) chart. This type of chart ignores time and draw lines only when the price moves enough. A Line Break Chart is particularly helpful for the identification and confirmation of trend reversals.
Introduction to Line Break Charts and the 3-Line Chart
Line Break Charts completely ignore time intervals and focus solely on the price action, and the current price trend. A Line-Break chart can be used for all timeframes and all financial asset classes. The user defines the number of Lines value, usually 2 or 3.
The four (4) types of lines explained
The Line Break Chart only draws lines if the price is forming a new high or low compared to the previews high/low. If the price does not make a high/low compared to the previous line, nothing happens. Each line is based on the closing price and not in the high/low range of each period.
Chart: EURUSD Line Break Chart
In the above EURUSD chart (TradeView.com) we use 10 ranges.
Uses of a Line Break Chart
In antithesis to classical chart types, a Line Break Chart is able to eliminate the effect of time and focus solely on where the market is heading.
(a) Recognize Support and Resistance Areas
A Line-Break Chart can identify areas of strong support and resistance.
(b) Spotting Price Breakouts
A Line-Break Chart is constructed based on the ‘breaking’ of highs and lows, consequently, it is ideal for spotting price breakouts.
(c) Spotting Price Reversals
Line Break Charts are particularly useful for spotting reversals. Check at the end for more information.
(d) Identifying Classic Chart Patterns
As in the case of classical charts, chart patterns can be identified in a Line Break chart. Chart patterns such as Triangles, Head & Shoulders, Double Bottom/Top, and Triple Bottom/Top, etc..
A Line-Break Chart includes up and down bars, the number of which is decided by the user.
The 3-Line Chart
The most commonly used number of Line Setting is three (3), and therefore, we refer to a 3-line chart. The 3-Line Break Chart is focusing on the breaking of three lines. Each time the closing price goes above the high or below the low of the prior three lines, a new line is formed.
How New Lines are Formed?
At the end of each closing period there are three possible outcomes:
(i) No Line -If the price is unchanged or there is a reversal not meeting the criteria
(ii) New Continuation Line -If the price continuous in the same direction and a new same-color line is formed
(iii) New Reversal Line -If the price changes enough (according to criteria) in the opposite direction and a new different-color line is formed
The 3-Line Break chart can be a reliable tool for identifying and trading reversals.
Commonly, you wait until the price has made 3 lines, or more, in the same direction (upward or downward) and a reversal line is forming. As the reversal line is formed, the trade opens in the same direction as the direction of the reversal.
For confirming entries, you can combine the 3-Line Break chart with a momentum oscillator such as RSI or Stochastic. For intraday trades, my favorite tool for identifying overbought/oversold levels is RSI(21) on the M5 timeframe.
◙ Line-Break and 3-Lines Break Charts
Renko Price Chart
The Renko Chart is a type of chart that plots only selected pip-movements by eliminating the impact of time.
Renko comes from the Japanese word Renga which means brick. This type of chart is valuable for Swing Trend-Traders and Long Trend-Traders but not for common Day-Traders. The Renko Chart plots only selected pip-movements by eliminating the impact of time.
Any price level plotted on a Renko Chart is based on a minimum pre-specified pip movement no matter the time.
The smaller the pip size, the more movements will be shown on a Renko Chart. On the other hand the larger the selected pip size the less movement will be shown.
◙ Usually, Forex Traders use ‘bricks’ between 3 and 16 pips but others may use bricks even 100 pips
◙ Stock Traders use usually ‘bricks’ that count 1.0% of the price of the stock
These are the main features of Renko Charts:
(1) Renko Charts are similar to Range Charts and are used for the early identification of changes in the general market sentiment
(2) A Renko Chart updates tick by tick
(3) Renko Charts are used for the elimination of the market noise by excluding minimum price changes
(4) A Renko Chart bar can be opened and closes in 1 hour or in 5 minutes
(5) Traders can select the minimum size of the pip movement that it will be shown on the chart
(6) More bars are plotted during high-volatility days and fewer bars during low-volatility days
The Heikin-Ashi chart is a candlestick type of chart with some unique characteristics for Forex Trading. A Heikin-Ashi chart uses a unique way of plotting each bar as you can see in the EURUSD chart below.
Here are some advantages when trading using the Heikin-Ashi charts:
(1) The Heikin-Ashi charts make the candlesticks and trends to be easy identified
(2) Heikin-Ashi Candlesticks appear smoother and can filter the misleading market noise
(3) Heikin-Ashi Candlesticks can foreshadow trend reversals and quickly identify classic patterns
(3) Using the Heikin-Ashi Chart traders may identify trendlines, support and resistance, retracements, etc
(4) Momentum oscillators and Volume indicators can be combined with the Heikin-Ashi Chart as with any other chart type
(5) There are no price gaps on a Heikin-Ashi chart
This is how the Heikin-Ashi chart plots its bars:
◙ Closing Price = Current Bar ( Open + High + Low + Close ) / 4
◙ Opening Price = Previous Bar [ (Open Bar) + Close) ] / 2
◙ High Price = Max Current Bar ( High, Open, Close )
◙ Low Price = Min Current Bar ( Low, Open, Close )
A Range Charts is also known as a Range Bar and it is a type of chart that is entirely based on a range of pip movement.
A Range chart is a type of chart that is entirely based on a range of pip movements and not on time. That means that a bar is plotted only if a pre-specified range of pips is achieved no matter if that range is achieved in a few minutes or in a few hours. That price movement is calculated between the high and the low and each bar is closing either at high or low.
The Range Charts were developed in the mid-90ss by Vicente M. Nicolellis, a Brazilian trader.
Range charts eliminate the factor of time
A Range chart bar will always close at a high or at a low
A Range chart bar has the same price increment
Range Charts are able to eliminate the annoying market noise
Range charts plot more bars during active market hours and a few bars during non-active market hours
Range charts become more active in high-volatility days and less active in low-volatility days
Range charts are ideal for analyzing trending markets
Forex traders usually set ranges between 5 and 25 ticks.
◙ Short-Terms: 5 ticks, 10 ticks, and 12 ticks
◙ Long-Term: 20 ticks and 25 ticks