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Three
Line Break
Description
Three
Line Break charts originate from Japan and were
introduced to the western world by Steve Nison (a
well-known authority on the Candlestick charting
method). The
Three Line Break charting method gets its name
from the default number of line blocks typically
used.
Using
the closing price, a new green block is added in a
new column if the previous high price is exceeded.
A new red block is drawn if the close makes
a new low. If
there is neither a new high or low, nothing is
drawn.
With
a default Three Line Break, if a rally is powerful
enough to form three consecutive green blocks,
then the low of the last three green blocks must
be exceeded before a red block is drawn.
If a sell-off is powerful enough to form
three consecutive red blocks, then the high of the
last three red blocks must be exceeded before a
green block is drawn.
To
draw line break blocks, today's close is compared
to the high and low of the previous block.
A block is drawn only when today's close
exceeds the high or low of the previous block.
If today's close is higher than the top of
the previous block, a new green block is drawn in
the next column from the prior high to the new
high price. If
today's close is lower than the bottom of the
previous block, a new red block is drawn in the
next column from the prior low to the new low
price. If
the close fails to move outside the range of the
previous blocks high or low, then nothing is
drawn.
With
the default Three Line Break chart, a downside
reversal (i.e., green blocks change to red blocks)
occurs when the price moves under the lowest price
of the last three consecutive green blocks.
A red reversal block is drawn from the
bottom of the highest green block to the new
price. An
upside reversal (i.e., red blocks change to green
blocks) occurs when the price moves above the
highest price of the last three consecutive red
blocks. A
green reversal block is drawn from the top of the
lowest red block to the new high price.
Indicators
calculated on Three Line Break charts use all the
data in each column and then display the average
value of the indicator for that column.
Interpretation
There
are many ways to trade with Three Line Break
charts. The
most basic method involves buying when a white
block emerges after three prior black blocks, or
selling when a black block appears after three
white blocks.
An
advantage of the Three Line Break chart is that
there is no arbitrary fixed reversal amount.
It is the market's action which gives the
indication of a reversal.
Reversal signals in Three Line Break charts
are sent well after the new trend has started.
However, many traders are comfortable with
this insofar as they believe that it is safer to
be in for the major part of the trend rather than
trying to pick a top or bottom.
To
adjust the sensitivity of the reversal criteria,
traders can adjust the number of blocks that need
to be broken before a reversal is drawn.
Thus, two line or four line break charts
can be used instead of the standard Three Line
Break charts. Shorter
time frame traders should use shorter reversal
amounts (e.g., two or three), whereas longer term
investors should use longer reversal amounts
(e.g., five or even 10).
The most popular line break chart in Japan
is the Three Line Break chart.
For
more in-depth coverage of the Three Line Break
charting method, we recommend the book Beyond
Candlesticks by Steve Nison. |
