When the lowest value of current price is below minimal value of three black lines, the black line should be laid in the next column. You might also be interested in: Contat us at research dailyfx.
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The white and red bars are called lines. Notice that whenever we have consecutive white lines, each line has a higher close than the previous one; when we have consecutive red lines each line has a lower close than the previous line. Line break charts are defined by two values: 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:. As you can see from the construction rules, white lines are only drawn if the daily bar closes above the previous line, or if the daily bar closes below the lowest low of the last three lines.
The rules for red bars are the inverse of this. Figure 2 shows the relationship between the 3 line break chart on top and the daily chart on the bottom. The numbers on the bars indicate how single bars or groups of bars on the daily chart relate to the white or red lines on the 3 line break chart. Daily highs and lows are not shown on the line break charts, just closing prices.
This needs to be borne in mind when back testing a line break chart because we have no way of knowing how far price actually moved above or below the lines. A system based on line break charts must therefore have all entries and exits based on the close or open of a line. As mentioned earlier, the two key values of a line break chart are the line break number and the underlying time interval. We can construct line break charts based on daily, weekly, 5 minute, hourly, any time frame, they can even be based on an underlying tick count, for example a tick interval.
This allows us to adapt them for day trading or swing trading systems. The line break number itself can also be changed. This allows us to tailor the strength of the reversal needed to declare a change in direction, or change in line color.
The simplest application of line break charts is to use the change in line color as a trade setup: Looking at Figures 1 and 2 we see that this can be quite an effective strategy in strongly trending markets, however during market consolidations it can lead to significant losses. Alternating line colors are a clear sign of consolidation in the market and can help mitigate that risk somewhat by telling us when to stay out of the market.
Another approach that works well with line break charts is to use them for identifying simple chart patterns. Figure 3 shows how well the chart highlights a double top and double bottom formation that defined a short term trading channel. A line closing below or above this channel gives us a clear setup for going long or short, and we can use the height of the channel in projecting the target for the move. We could also use simple trend lines to indicate reversals or to help us trail a stop in an existing trend.
Figure 4 shows a simple system based on a 3 line break chart with an exponential moving average and the CCI commodity channel index oscillator. Rules for shorts are the inverse. The green arrows show long or short entries and the red arrows show the exits. Finally, line break charts can serve as a directional filter for setups on different time frame charts. Only go long if the last line was white; go short if it was a red line.
They can be used on their own or in combination with other charts. Just be careful when back testing these charts, remember that only closing prices are plotted, not highs and lows, so test results may look much better than real trading results would have been. Line Break charts when understood and automated with the proper setting are the highest performing method of trading and superior to all other charting method.
They are not helped by indicators and they should not be use. One of the worse settings to use is 3 — 1. There is no 3 line break as a proper name and anyone that uses it does not understand line break charts. Email will not be published required. Notify me of follow-up comments by email. Notify me of new posts by email. Call Us - or In the next column the line will be white if its highest point is above the highest point of previous white line.
And on the contrary — the black line is drawn when its lowest point is below the lowest point of previous black line. If maximum point of the line is above maximal point of previous white lines, the white line should be laid. Or the black line should be drawn if the lowest value is less than lowest value of previous two lines.
Should the price be located within the range of previous lines, nothing is put on the chart. It is important that price not only must reach lowest and highest points but must exceed them. Let's assume that three subsequent white or black lines were present on the chart, which confirms bullish white line or bearish black line trends. In this case, reversal will take place when current price is below minimal value of three previous lines if trend is bullish , or gets higher than maximum value of the lines built earlier if the trend is bearish.
When the highest value of current price is above maximum value of three white lines, the white line should be laid in the next column. When the lowest value of current price is below minimal value of three white lines, the black reversal line should be laid in the next column.
When the lowest value of current price is below minimal value of three black lines, the black line should be laid in the next column. When the highest value of current price is above maximum value of three black lines, the reversal white line should be laid in the next column. We will be pleased to answer any questions you may have. Huckster Forex Advisors Shop.
Base line first If close price of current candle exceeds base price, while line is laid. Second line In the next column the line will be white if its highest point is above the highest point of previous white line. Third line If maximum point of the line is above maximal point of previous white lines, the white line should be laid. Line break Let's assume that three subsequent white or black lines were present on the chart, which confirms bullish white line or bearish black line trends.