TRADING 04 FUTURES

[TREND1]

Invented in Japan, Three Line Break charts ignore time and only change when prices move a certain amount. In this regard, these charts are quite similar to Point & Figure charts. Three Line Break charts show a series of vertical white and black lines. White lines represent rising prices, while black lines portray falling prices. Prices continue in the same direction until a reversal is warranted. A reversal occurs when the closing price exceeds the high or low of the prior two lines.

Construction


Before looking at construction details, a couple of clarifications are in order. First, the black and white bars on the price chart are called “lines”. Second, line changes are based on closing prices, not the high-low range. Third, Three Line Break charts evolve based on price, not time. The first chart below shows 85 candlesticks or trading days from March 21st until July 20th. A Three Line Break chart condenses this price action into 44 black and white lines. This technique filters the noise to focus only on price movements that are deemed significant.

Conclusions


Like their other Japanese cousins (Kagi and Renko), Three Line Break charts filter out the noise by focusing exclusively on price changes. The lines do not change unless price changes by a specific amount. In contrast to Point & Figure charts, which used a fixed box size, this amount depends on the range of the last 2 lines. This range can vary quite a bit. The ability to filter noise makes these charts especially useful to determine the underlying trend. It is easy to spot important highs and lows. Armed with this information, chartists can identify uptrends with higher highs and higher lows or downtrends with lower lows and lower highs. As with all charting techniques, chartists should employ other technical analysis tools to confirm or refute their findings on Three Line Break charts.




http://stockcharts.com/school/doku.php?st=3+line+break+chart&id=chart_school:chart_analysis:three_line_break