Spotting when a stock, crypto, forex or commodities price etc is about to turn the other way (price reversals) is a notoriously difficult thing to successfully call consistently as a trader. There is a chart type from Japan though that makes this task a lot easier and helps put the odds more on your side. It also can help make the 'trend' more obvious and helps add 'consistency' to your trading & investing?! What is this chart type called? The LINE BREAK chart!
Line Break charts due to the evolution of trading and technical analysis software packages can be made into very successful trading strategies and a great accompaniment to your general market analysis. In this article I will briefly intraduce you to Line Break charts and also to my totally FREE course on this chart type on my YouTube channel!
As you can gather I am a big fan and user of the Japanese chart types: Renko, Kagi, Heikin Ashi and Line Break. You may have also heard of Line Break charts being called 3 Line Break Charts. They are the same thing. The number at the front signifies an input you can make to get a different perspective on the price action on this type of chart.
So lets summarise the Line Break chart before moving on:
- Created in Japan.
- Ignores time and changes direction when prices move by a given criteria.
- Similar to Point & Figure charts.
- Excellent for spotting price reversals/turning points especially when used in conjunction with other momentum indicators.
- Also very good for trend identification.
- Works in all time frames (although initially created as a chart with 'no time'): End of Day and Intraday.
- Most popular style of Line Break chart is the 3 Line Break.
From the two daily charts below on the GBPUSD, notice on the 3 Line Break chart (right), how much easier it is to spot reversals in the price and how much 'clearer' the data looks over the traditional candlestick chart (left):
Basics:
- Line Break charts show a series of vertical white and black lines. (Or coloured appropriately to suit your own charts – I use red for down and green (or black) for up)
- New lines are created based on the closing price. If the previous high is exceeded a new bullish line is added. If the low is exceeded then a new bearish line is added. If price stays within the range no new line is drawn.
- Prices continue in the same direction until a reversal is created.
- A reversal occurs when the closing price exceeds the high or low of the prior two / three/ four / five lines etc.
- Can have a ‘2 line’ break method for quicker entry / exit.
- Most common is the 3 line break / reversal.
- 5 line break for slower trends – have been known to go up to 10 line break charts.
Construction:
- One of the good things about Line Charts, is that there are no inputs required like in Kagi or Renko charts. All you need to do is set the line break size.
- These charts only use the closing price.
- The Line Chart works in any timeframe – although we are taking away time, modern charts have added it back n. All this means is that the lower the time frame, the more bars you’ll get in any one trading day, and vice versa.
Example: Gold 240 minute 3 Line Break Chart (Charts: TradingView):
Trading using Line Break charts:
With the advancement in charting software technology, it is now also possible to enhance Line Break charts further, by using other momentum indicators to build out some great trading strategies.
Uses of Line Break charts:
- Trading by itself or in conjunction with other momentum indicators.
- Filtering out trading noise.
- Extremely useful for spotting reversals.
- Extremely useful for spotting support and resistance, patterns and trends.
- Used in conjunction with other chart types to confirm a trade signal.
EXAMPLE: Cocoa Daily 3 Line Break Chart + Stochastics:
Stops:
Can you use stops on 3 Line Break charts? Yes:
Basic rules:
- Use levels of support and resistance – use the turning points of the Line Break chart for a more aggressive approach.
- Use indicators e.g. moving averages, bands, historical volatility, ATR etc.
- You can use the Historical Volatility calculator to set stop levels (you’ll learn this on the Trade Management module.)
- You can trail your stops a number of lines or behind significant price levels.
- A loose rule: If there are 8 to 10 lines in any one direction, this can signify that the asset is susceptible to a change in price direction.
I've used Line Break charts successfully for over 2 decades and built the concept into many successful trading strategies. I also use Line Break charts a lot in my posts on Tiger Brokers so I wanted to explain how they work to make translating my thoughts easier via a FREE video course I have on my YouTube channel (thestophunter) that covers the whole subject, taking you from zero to hero in just a few hours!
The Line Break course link (copy and paste into your browser): https://youtu.be/FST0iaJZ928
What will you learn? Content summary:
CONTENT:
- S1 Introduction
- S2 What Are Line Break Charts?
- 2.1 Relationship to other Japanese chart types
- 2.2 Line Break charts and dealing with trading psychology
- 2.3 Basic Line Break chart construction
- 2.4 Line Break charts & time
- 2.5 Using Line Break charts
- S3 : Strengthening the predictive power of your Line Break charts
- 3.1 Adding Western indicators on to your Line Break charts
- 3.2 Line Break chart patterns
- 3.3 Line Break / Western Indicators 101
- 3.4 Trends
- 3.5 Moving Averages (MAVs)
- 3.6 Bands
- 3.7 Relative Strength Indicator (RSI)
- 3.8 Directional Movement Indicator (DMI)
- 3.9 Darvas Box
- 3.10 Donchian Bands
- 3.11 Awesome Oscillator (AO)
- 3.12 Fibonacci
- 3.14 Simple Line Break strategy
- 3.15 Applying trade/ risk management to Line Break trading
- S4 : Trading Line Break Charts
- 4.1 Putting it together & further Line Break ideas & examples
- 4.2 Rules for creating and running Line Break trading strategies
- 4.3 Other ideas for using your Line Break charts
- S5 : Line Break Course Round Up
- 5.1 Further Support & Resources
- 5.2 Course Roundup
If you’d like to find out more about what I do, you can get in touch with me via:
- Email: info@thestophunter.co.uk
- Website: www.thestophunter.co.uk
- YouTube: thestophunter
Visit my YouTube channel for loads of free educational content / courses / tips / analysis /ideas via my TIGER Intro post: THE STOP HUNTER (Links to YouTube at bottom of post)
Risk Warning: This course is purely for educational purposes and should not be construed as investment advice. Always be aware that trading and investment comes with a high degree of risk - always speak to your financial adviser first before investing and trading.
Comments