Three Line Break Charts [ChartSchool] (2024)

Three Line Break Charts [ChartSchool] (1)

Table of Contents

Introduction

Invented in Japan, Three Line Break charts ignore time and only change when prices move a certain amount (similar to Point & Figure Charts). Three Line Break charts show a series of vertical white and black lines; the white lines represent rising prices, while the 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.

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Two Line Reversals

Each new closing price produces three possibilities.

  • A new line of the same color is drawn when the price extends in the same direction.

  • A new line in the opposite color is drawn when the price change is enough to warrant a reversal.

  • No new lines are added when price does not extend the trend or the change is not enough to warrant a reversal.

The high or low of the prior two lines sets the reversal point. If the most recent line is black (down), then the high of the last two lines marks the reversal point. A close above this high would call for a white line to denote a price reversal. Keep in mind that only the most recent line must be black (down). The line just before this black line can be white (up) or black (down). It is the low of these two lines that dictates the reversal point. The chart below shows Dell Inc (DELL) with three 2-line reversals; the first two formed with two black lines, while the third formed with a white line and a black line. The horizontal red lines mark the reversal point, which the white line exceeded to forge the reversal.

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If the most recent line is white (up), then the low of the last two lines marks the reversal point. A close below this low would call for a black line to note a price reversal. Keep in mind that only the most recent line must be white (up). The line just before this white line can be white (up) or black (down); it is the low of these two that decides the reversal point. The chart below shows United Parcel (UPS) with three 2-line reversals. The first and third reversals feature a black line/white line combination, while the middle reversal shows two white lines. The horizontal green lines mark the lows or reversal points, which the subsequent black line exceeded to forge the reversal.

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Three Line Reversals

As the name implies, the Three Line Break Chart is all about breaking three lines. Two line reversals can occur in a trading range or as a continuation of the bigger trend. A Three Line Break, on the other hand, denotes a stronger move that can signal a trend reversal. 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.

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The chart above shows the Russell 2000 ETF (IWM) moving from a downtrend to an uptrend and back to a downtrend. 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.

Support and Resistance

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.

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Patterns

Classic patterns are also viable on Three Line Break charts. Double Bottom, Double Top, Head-and-Shoulders Patterns, Triangles, and others can form on these charts. The chart below shows Vulcan Materials (VMC) with a large Symmetrical Triangle forming from January to May. The stock broke the lower trend line and support with a sharp decline in early May.

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Conclusion

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 with regard to determining 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.

SharpCharts

Three Line Break Charts can be drawn in SharpCharts by selecting Three Line Break for “Type” under “Chart Attributes”. Users can check the “color prices” box to see red lines for the down periods. Click here for a live example.

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Three Line Break Charts [ChartSchool] (10)

Further Study

As the name implies, this book goes beyond candlesticks to show chartists other technical analysis techniques that originated in Japan. Nison devotes an entire chapter to Three Line Break charts; additionally, he covers Renko charts, Kagi charts and explains how Japanese traders use moving averages.

Beyond Candlesticks
Steve Nison
Three Line Break Charts [ChartSchool] (2024)

FAQs

How to trade 3 line break charts? ›

If you see the line break chart break through an area of support or resistance, then you can trade in the direction of the breakout. If you see three or more lines form in one direction, and then a new line forms in the reverse direction, you can try trading in the direction of the new line.

Is a line break chart good for trading? ›

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.

What is the triple line method in trading? ›

3-Method Formations, commonly known as the “Three Line Strike” pattern, are reliable candlestick patterns traders use worldwide. They effectively identify reversals and continuations in the market, providing a roadmap for traders to optimize their entry and exit points.

What is the three line break indicator in Tradingview? ›

The typical "Number of Lines" setting is 3, meaning the chart forms a new up line when the closing price is above the high prices of the last three lines, and it forms a new down line when the closing price is below the past three lines' low prices.

What is the 1 2 3 trading method? ›

The classical approach to pattern 1-2-3 involves opening short positions at the break of the correctional low. The buyers who seriously expect the upward trend to be restored are most likely to have set their stop orders there. Their avalanche triggering allows you to see a sharp downward movement in the chart.

What is the pattern of a three line break? ›

Three Line Break charts show a series of vertical white and black lines; the white lines represent rising prices, while the 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.

What chart do most traders use? ›

Candlestick charts are perhaps the most widely used among active traders. In some ways, candlestick charts blend the benefits of line and bar charts as they convey both time and impact value. Each candlestick represents a specific timeframe and displays opening, closing, high, and low prices.

What is the most accurate chart pattern to trade? ›

Head and Shoulders Pattern: The head and shoulders pattern is considered one of the most reliable chart patterns and is used to identify possible trend reversals.

Are chart patterns enough for trading? ›

Chart patterns work by representing the market's supply and demand. This causes the trend to move in a certain way on a trading chart, forming a pattern. However, chart pattern movements are not guaranteed, and should be used alongside other methods of market analysis.

Is triple bottom line a strategy? ›

Fast facts about the triple bottom line: It is a transformation framework to help businesses and organizations move toward a regenerative and more sustainable future. TBL offers tools that help an organization measure, benchmark, set goals, and eventually evolve toward more sustainable systems and models.

What is the triple line method? ›

The TBL is an accounting framework that incorporates three dimensions of performance: social, environmental and financial. This differs from traditional reporting frameworks as it includes ecological (or environmental) and social measures that can be difficult to assign appropriate means of measurement.

What is the triple top line strategy? ›

The triple top line concept was coined by William McDonough and Michael Braungart (2002) in their ground breaking book 'Cradle to Cradle'. Their key message is that waste equals food, meaning that the manufacturing of goods does not need to damage the environment through waste or pollution.

What is the most powerful indicator in TradingView? ›

Best TradingView Indicators: Bollinger Bands. Bollinger Bands are essential for understanding and navigating market volatility in futures trading. Bollinger Bands, when used through TradingView on the Optimus Futures platform, are indispensable for understanding and navigating market volatility in futures trading.

How to confirm trend line breakout? ›

Initially, the price of the asset appears to break above or below a trendline. This break may even be accompanied by increased trading volume, which can provide confirmation of the breakout. Traders' Reactions. Many traders may interpret the breakout as a significant move and initiate trades in that direction.

How do you trade trendline breakdown? ›

Factors to Consider When Trading Broken Trendlines
  1. Candlestick Patterns. Traders look for candlestick patterns that support the direction of the breakout, such as bullish engulfing patterns for an upside breakout and bearish engulfing patterns for a downside breakout.
  2. Oscillators. ...
  3. Chart Patterns.
Feb 9, 2024

How do I trade a 3 drive pattern? ›

You can trade a three-drive pattern in the same way as an ABCD pattern. Wait for the final drive to end, then trade the reversal that should follow – opening a buy position if the market has bottomed, and a sell if it has topped.

How do you get 3 charts on TradingView? ›

To view multiple charts on TradingView, follow these steps:
  1. Click on Select Layout .
  2. Select the number of charts to be viewed (up to 8 charts can be viewed).
  3. Click on the chart and enter the name of the instrument.
  4. Click on Save .

What is the 1 3 rule in trading? ›

In summary, the statement highlights the importance of having a favorable risk-reward ratio in trading. With a 1:3 ratio, you can be a profitable trader even if you win only 26% of the time, as long as your winners are three times larger than your losers.

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