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 Line values, usually 2 or 3.
The four (4) types of lines explained
- Uptrend Lines (If the closing price exceeds the previous line's high price)
- Downtrend Lines (If the closing price drops below the previous line's low price)
- Projected Uptrend Lines {an uptrend projection before actual closing)
- Projected Downtrend Lines {a downtrend projection before actual closing)
The Line Break Chart only draws lines if the price is forming a new high or low compared to the preview 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 Settings 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
Key-Points
- The lines on the chart are constructed based on specific criteria and filters
- The user of the Line Break Chart decides the number of Line Value
- Each line is based on the closing price and not in the high/low range of each period
- Line Break charts are exclusively price-driven, and not time-based
- The time axis includes dates that are not evenly distributed as in classical chart types
- A wide variety of chart patterns can be identified in a Line Break chart, support and resistance as well
- Simple and complex indicators can be applied
- A Line-Break chart is a good tool for confirming price breakouts and especially price reversals
How to Trade Reversals Using the 3-Line Break Chart
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 created, 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.
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◙ Line-Break and 3-Lines Break Charts
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