Line break chart

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A line break chart, also known as a three-line break chart, is a Japanese trading indicator and chart used to analyze the financial markets. [1] Invented in Japan, these charts had been used for over 150 years by traders there before being popularized by Steve Nison in the book Beyond Candlesticks. [1] [2] The chart is made up of vertical blocks or bars called "lines", which indicate the market's direction. [3]

Contents

Function

Similar to other financial charts invented in Japan such as Kagi charts and Renko charts, line break charts evolve based in large part on price and in lesser part on time. [4] The more widely used candlestick charts are based on a strictly uniform time scale where each new candle evolves after a certain time period. [5] Unlike candlesticks however, line break charts also do not contain "wicks" on each bar or line as there are no high or low values. [4]

Line break chart Line Break Chart.webp
Line break chart

Line break charts contain an “up line” and a “down line” which are normally distinguished using different colors, e.g., an up line can be represented by a green line and a down line can be represented by a red line. [6] A new up line is added when the previous high is exceeded by the underlying chart's close and a down line is added when the previous low is exceeded by the underlying chart's close. [7] If neither previous high (in an uptrend) nor previous low (in a downtrend) is breached by the underlying chart's close, nothing is added to the chart. The closing price is what dictates whether or not a previous line has been exceeded. [8] [7]

Three-line break

A more common version of line break charts is a “three-line break” chart, which indicates that for a market reversal to occur (a new line that forms in the opposite direction to the previous lines), the price will have to break above or below the previous three lines depending on the direction of the lines. [9] This therefore ensures that a market reversal (a change from downtrend to uptrend or vice versa) is determined only by a large enough move in price. [1] [3]

Reversal pattern on line break charts LBCR.jpg
Reversal pattern on line break charts

A trend is confirmed after three consecutive lines going in the same direction. [10] For example, an uptrend will be confirmed once three consecutive up lines are formed. [3] This shows that each new line has extended the trend and so the price continues in the same direction. [11]

Other forms

Line break charts can be adjusted depending on the trading strategy, this is known as "adjusting the sensitivity." [12] Adjusting the sensitivity involves changing the number of lines the market has to break before a reversal line is drawn. [13] Modern charting software (like MetaTrader 4 or TradingView) allow building line break charts using any number of lines required for reversals.

The less common two line break chart indicates that the trend has reversed once the previous two up or down lines have been broken. Charts with higher sensitivity such as two line break and three line break are generally used by shorter-term traders looking for small and quick market reversals. Charts with lower sensitivity such as four to ten line break are generally used by longer-term traders who target only major market moves. [12]

Neck pattern and scenario where it is used NeckLineBreak.jpg
Neck pattern and scenario where it is used

Patterns

A short down line is called a shoe, an upwards reversal line (up line that broke the previous three down lines) is called a suit, and a short up line that emerges immediately from an upwards reversal line is called a neck. [14]

In some strategies traders will look for a neck as a buy signal as an up line after a market reversal indicates that the trend has changed from a downtrend to an uptrend with the neck serving as an extra "bullish confirmation." [14]

Related Research Articles

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The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

<span class="mw-page-title-main">Candlestick chart</span> Type of financial chart

A candlestick chart is a style of financial chart used to describe price movements of a security, derivative, or currency.

In stock and securities market technical analysis, parabolic SAR is a method devised by J. Welles Wilder Jr., to find potential reversals in the market price direction of traded goods such as securities or currency exchanges such as forex. It is a trend-following (lagging) indicator and may be used to set a trailing stop loss or determine entry or exit points based on prices tending to stay within a parabolic curve during a strong trend.

Point and figure (P&F) is a charting technique used in technical analysis. Point and figure charting does not plot price against time as time-based charts do. Instead it plots price against changes in direction by plotting a column of Xs as the price rises and a column of Os as the price falls.

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<span class="mw-page-title-main">Trix (technical analysis)</span>

Trix is a technical analysis oscillator developed in the 1980s by Jack Hutson, editor of Technical Analysis of Stocks and Commodities magazine. It shows the slope of a triple-smoothed exponential moving average. The name Trix is from "triple exponential."

The commodity channel index (CCI) is an oscillator indicator that is used by traders and investors to help identify price reversals, price extremes and trend strength when using technical analysis to analyse financial markets.

<span class="mw-page-title-main">Kagi chart</span>

The Kagi chart is a chart used for tracking price movements and to make decisions on purchasing stock. It differs from traditional stock charts such as the Candlestick chart by being mostly independent of time. This feature aids in producing a chart that reduces random noise.

<span class="mw-page-title-main">Pivot point (technical analysis)</span>

In financial markets, a pivot point is a price level that is used by traders as a possible indicator of market movement. A pivot point is calculated as an average of significant prices from the performance of a market in the prior trading period. If the market in the following period trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish.

Munehisa Honma was a rice merchant from Sakata, Japan who traded in the Dōjima Rice Exchange in Osaka during the Tokugawa Shogunate. He is sometimes considered to be the father of the candlestick chart, a form of technical analysis used in stock markets.

<span class="mw-page-title-main">Three black crows</span> Stock market term

Three crows is a term used by stock market analysts to describe a market downturn. It appears on a candlestick chart in the financial markets. It unfolds across three trading sessions, and consists of three long candlesticks that trend downward like a staircase. Each candle should open below the previous day's open, ideally in the middle price range of that previous day. Each candlestick should also close progressively downward to establish a new near-term low. The pattern indicates a strong price reversal from a bull market to a bear market.

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<span class="mw-page-title-main">Morning star (candlestick pattern)</span>

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<span class="mw-page-title-main">Gap (chart pattern)</span> Price chart analysis concept

A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap. Gaps are spaces on a chart that emerge when the price of the financial instrument significantly changes with little or no trading in between.

<span class="mw-page-title-main">Ichimoku Kinkō Hyō</span>

Ichimoku Kinko Hyo (IKH) (Japanese: 一目均衡表, Hepburn: Ichimoku Kinkō Hyō), usually shortened to "Ichimoku", is a technical analysis method that builds on candlestick charting to improve the accuracy of forecast price moves.

In financial technical analysis, a candlestick pattern is a movement in prices shown graphically on a candlestick chart that some believe can help to identify repeating patterns of a particular market movement. The recognition of the pattern is subjective and programs that are used for charting have to rely on predefined rules to match the pattern. There are 42 recognized patterns that can be split into simple and complex patterns. Author Thomas Bulkowski takes an in-depth look at 103 candlestick formations, from identification guidelines and statistical analysis of their behaviour to detailed trading tactics. He makes important discoveries and statistical summaries, as well as a glossary of relevant terms and a visual index to make candlestick identification easy.

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Heikin-Ashi is a Japanese trading indicator and financial chart that means "average bar". Heikin-Ashi charts resemble candlestick charts, but have a smoother appearance as they track a range of price movements, rather than tracking every price movement as with candlesticks. Heikin-Ashi was created in the 1700s by Munehisa Homma, who also created the candlestick chart. These charts are used by traders and investors to help determine and predict price movements.

References

  1. 1 2 3 "What Are Line Break Charts & How To Trade Them". The Forex Geek. 2022-09-29. Retrieved 2024-03-06.
  2. ↑ Nison 1994, p. 167.
  3. 1 2 3 "Three Line Break Charts". StockCharts. Retrieved 2024-03-06.
  4. 1 2 "Line Break Charts Explained Plus A Simple Trading Strategy". NetPicks. 2017-03-20. Retrieved 2024-03-06.
  5. ↑ Farley, Alan (2024-02-21). "What Is a Candlestick Pattern?". Investopedia. Retrieved 2024-03-06.
  6. ↑ "Line Break Charts". Barchart. Retrieved 2024-03-06.
  7. 1 2 "Line Break Chart". TradeStation . Retrieved 2024-03-06.
  8. ↑ Nison 1994, p. 169-172.
  9. ↑ Ursell, Mark (2015-06-15). "How To Trade 3 Line Break Charts Profitably". www.tradinformed.com. Retrieved 2024-03-06.
  10. ↑ Nison 1994, p. 172-173.
  11. ↑ "Three Line Break Chart Review | How to Trade Profitably with Charts?". A Digital Blogger. 2019-02-11. Retrieved 2024-03-06.
  12. 1 2 "Three Line Break". MarketInOut.com. Retrieved 2024-03-06.
  13. ↑ Nison 1994, p. 181-184.
  14. 1 2 Nison 1994, p. 184-187.

Bibliography

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