Developing a system #8 (Three line break fofo strategy)

Three Line Break charts are especially useful for detecting changes in trends. No new lines are added when price does not extend the trend or the change is not enough to warrant a reversal. Please note that the Reversal parameter gives the number of lines to be taken into account, not a fixed price value as for the related methods Kagi and Renko. Nison recommends to use three-line break charts together with candlesticks. Free e-books Currency Index Forex bonus Video course.

Oct 21,  · The genuine 3 line break chart should not have a x axis based on time. New candles will only form when there is a 3 line break of the high/low. I have tried searching for the genuine 3 line price break chart on metatrader 4.

Construction

A bullish trend reversal occurs when three black lines form and a single white line breaks the high of these three lines. A bearish reversal occurs when three white lines form and a single black line breaks the low of these three lines. The downtrend starts with the first black line on June 6th. A new black line will not be drawn unless prices move below this low. Notice how the date moved from June 6th to June 8th without a line in between 1. June 7th is not shown because prices did not move enough to justify a new black line or a white reversal line.

Prices moved to a new low on June 8th to justify a new black line. This downtrend continued until the closing price exceeded the high of the prior three black lines 2. This 3-Line Break signaled the start of a new uptrend on June 21st.

Prices traded within the range of this white line until June 28th 3. On June 28th, five trading days later, prices exceeded this high to justify a new white line.

Prices continued higher the next six trading days as new white lines were added each day. The uptrend reversed when prices moved below the low of the prior three white lines 4. This 3-Line Break justified a new black line to signal the start of a downtrend. Three Line Break Charts produce clear reaction highs and lows upon which to base resistance and support. Chart analysis works the same way as on a bar or candlestick chart.

The example below shows Constellation Energy CEG with a clear resistance zone marked by three reaction highs. The stock broke resistance with a surge in early April and continued much higher.

Also, notice that a falling flag or channel formed in February. Classic patterns are also viable on Three Line Break charts. The stock broke the lower trend line and support with a sharp decline in early May.

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. 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. Click here for a live example. As the name implies, this book goes beyond candlesticks to show chartists other technical analysis techniques from the Far East.

Nison devotes an entire chapter to Three Line Break charts. Nison also covers Renko charts, Kagi charts and explains how Japanese traders use moving averages. In order to use StockCharts. Click here to learn how to enable JavaScript. Log In Sign Up Help. Three Line Break Charts. A long reversal can only occur when the market has closed above the high of the previous 3 lines.

In the example below a short reversal line breaks below the preceding 3 lines. A new line is always significant because we have a new high or low. This means that the chart is less cluttered. There is more information on the candlestick chart, but this can sometimes be distracting. The simplest way to trade using 3 line break charts, is to wait until the market has made at least 3 lines in the same direction.

Then wait until a reversal line has formed and enter in the direction of the reversal. This is the start of a new potential trend and we can get in nice and early. It is easy to combine 3 line break charts with other technical indicators. For example, a moving average can be used to define the trend. Then a 3 line break can be used to enter in the direction of the trend. Counter trend traders can combine 3 line break charts with momentum indicators to identify good reversal opportunities.

For example, the stochastic oscillator can be used to identify overbought and oversold areas. Another common way to use 3 line break charts is to combine them with Japanese candlestick patterns.

Reversal candles and patterns such as dojis, bullish engulfing patterns and tweezer bottoms. The 3 line break charts can be used to identify the dominant trend and then the candlesticks are used to time trade entries. I was interested in testing how profitable a simple 3 line break chart strategy was on historical price data.

So I set up a backtest using a Tradinformed Excel spreadsheet. You can view the latest models in the Tradinformed Shop.

Get a Tradinformed Backtest Model now and see how much better your trading can be. The test was straightforward.

It was intended to find out whether 3 line break charts can be a useful part of a trading strategy. In this backtest I have not tested the effect of stop-losses, trailing stops or profit targets.

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If you are interested in using Excel for 3 line break charts you can download a free Excel spreadsheet containing 3 line break charts just by signing up to the Tradinformed mailing list. Beyond Candlesticks. 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. Line break charts are defined by two values: the line break number and the underlying time interval. These values are used in the construction of the line break chart. The chart above is a 3 line break chart of the daily YM and in this case the construction rules are as follows, assuming the last line on the chart was a white line.