Helpful Information, Articles, Tips and Tricks
for Day Traders.

How to Trade Three Line Break Charts Profitably
Three Line Break Charts are a type of charting system that originated in Japan.
They are particularly useful for identifying the current trend and also trend reversals.

A clue to understanding these charts is in the name, they are a type of breakout chart. They are distinctive because they only show significant price moves.
Significant price moves occur when the closing price is higher or lower than the preceding bars.

Three line break charts are based solely on the closing price and do not display any intraday movements.

This is based on the idea that the closing price is the most important price of the day. In this system each bar is referred to as a line.



If you look closely at the previous chart you can see that each line follows on directly from the previous line.

A short reversal can only occur when the market has closed below the low of the previous three lines. A long reversal can only occur when the market has closed above the high of the previous three lines.

A market is trending when there have been three consecutive lines in the same direction.

Why use three Line Break Charts?

Three line breaks are great at defining the current market trend. A new line is always significant because we have a new high or low. This means that the chart is less cluttered. There is more information on the candlestick chart but this can sometimes be distracting.

Trading with Three Line Break Charts

The simplest way to trade using three line break charts, is to wait until the market has made at least three lines in the same direction. Then wait until a reversal line has formed and enter in the direction of the reversal. This is the start of a new potential trend and we can get in nice and early.

An alternative approach is to watch for reversal lines and then enter after the market has made at least three consecutive lines following a reversal.

It is easy to combine three line break charts with other technical indicators. For example a moving average can be used to define the trend. Then a three line break can be used to enter in the direction of the trend.

Counter trend traders can combine three line break charts with momentum indicators to identify good reversal opportunities. For example the stochastic oscillator can be used to identify overbought and oversold areas.

Another common way to use three line break charts is to combine them with Japanese candlestick patterns. Reversal candles and patterns such as dojis, bullish engulfing patterns and tweezer bottoms. The three line break charts can be used to identify the dominant trend and then the candlesticks are used to time trade entries.