Calling the turn when trading any financial market is a notoriously difficult thing to achieve with any given consistency. There are thousands of different technical analysis tools and techniques that try to give you this edge. One of the best and most simple I’ve come across is the 3 Line Break chart.
What is a 3 Line Break?
The 3 line break is a very useful Japanese style chart configuration that takes out a lot of the guess work from calculating turning points in a chart. It works across all assets and most time frames. 3 Line Break charts like its cousins the Renko chart and Point and Figure chart, ignores time and only updates when prices move by a certain criteria.
From the two daily charts below on the GBPUSD, notice on the 3 line break chart, how much easier it is to spot reversals in the price and how much ‘clearer’ the data looks over the traditional candlestick chart:
3 Line Break:
Setting up your 3 Line Break chart:
It is a chart made up of vertical lines: one colour for up (bullish) the other for down (bearish). Prices continue in the same direction until the reversal criteria is met. When does a reversal occur? The rule is very simple. When the closing price exceeds the high or low of the prior three lines. Note, that the ‘lines’ are based on closing prices and not ranges of prices e.g. high/low. This style of charting works well in any time frame.
You can be more aggressive by changing that to a two line break and making the reversal when the high or low of the prior two lines is broken, or less aggressive by using a five line break.
Trading using the 3 Line Break Chart:
Using 3 lines gives a better confirmation to the trend reversal. A bullish trend reversal occurs when three down lines form and a single up line breaks the high of these three lines. A bearish reversal occurs when three up lines form and a single down line breaks the low of these three lines.
Gold 240 minute 3 Line Break Chart:
With the advancement in charting software technology, it is now also possible to enhance 3 Line Break charts further, by using other momentum indicators to build out some great trading strategies.
I urge you to investigate the 3 Line Break chart further. It is a fantastic twist on the more traditional methods of charting and really does assist you in calling the turn. Most charting packages, free or paid for, should provide this style of chart. On the Cocoa Daily Chart example below you’ll see where the white lines break at the 3 line point. It works very well!
Article by Stephen Hoad BA Hons, MSc, MSTA
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