Line break charts OR price break charts are a special form of charts which reflects the sentiment better than a normal candlestick chart. A three-line break chart is a specific chart where a reversal box is formed only after the price breaks the high or low of last 3 previous boxes. Three line break chart is the most common among all line break charts but some analysts also use six line break charts in a lower time frame like 1 minute to catch the sudden moves during news like a budget day or inventory flash etc.
Line break charts are sentiment indicators of the same family line Renko, point, and figure etc and they show charts with minimized noise as compared to a regular candlestick chart.
There is a scarcity of good amibroker afls for sentiment indicators like Renko, Line break etc. But after much research, we have found a good amibroker formula for the three line break chart. You may download it from below. Please also check the image for how the indicator will look like:
In order to clarify the three line break chart pattern more clearly, I attach an image that only concentrates on the chart more specifically. The term “three line break” itself give hints of the chart pattern. As you know that red candle refers as bearish and blue as bullish. The set up is quite simple like conventional candlesticks, only three line break chart emphasis on the closing price.
The Strategy of the Three Line Break Chart
- In case of the bullish reversal pattern, a bullish candle should be higher than the hight made by three previous bearish candles.
- Bearish reversal pattern happens when a bearish candle is higher than the hight made by three previous bullish candles.
- Now, come to the discussion of the resistance level, if the reversal candle is bullish, the distance between resistance level and reversal candle needs to be at least the size of reversal candle and vice versa.
- In order to avoid false signal, you can apply RSI, Moving Average, Stochastic indicators according to your preference.
- Like conventional candlestick pattern, the three line also forms hear and shoulder, morning star, evening star, double top etc.
- It is advisable to set the support and resistance level prior to investment, otherwise, you may incur a loss.
However, this is one of the most widely used chart patterns in the technical analysis. In order to get a noise-free trading signal, you can use the three line chart for trading.