Line Break charts are forms of charts that measure price fluctuations without time intervals. They consist of a series of bars that form lines, showing closing prices. The charts were first discovered in Japan and introduced in the west by Steve Nison. The Line Break chart is a “more subtle form of point and figure charts, where reversals are decided by the market”, as described by a Japanese trader. It is made up of a series of vertical blocks called lines, that use closing prices to indicate market direction. Line break charts can serve as a directional filter for setups on different time frame charts.
What are Line Break charts?
The structure of the Line Break charts resembles Renko charts, but rather than forming breaks, the Line Break chart creates bars. These bars compromises of lines. The up lines identify upward movement and are colored green or white, while the down lines signify downward movement and are colored black or red.
A keynote for traders to remember is the lines settings. The whole trading method on Line Break charts depends on the set of lines. The Line Break takes the present closing price and compares it with the previous line. Commonly, the line settings are set at three. This means that the closing price of the current line is compared with the previous two lines’ closing price. If the current price is higher than the previous prices, then an up line will occur. If it is lower, then a down line will appear. And, if the current price is similar to the previous prices, no line will emerge.
Traders should not confuse Line Break charts with candlestick charts or Renko charts. In Renko charts, there are bricks, while in candlestick charts, there are candles containing wicks or no wicks.
The general rules for calculating a Line Break chart are:
If the price exceeds the previous line’s high price, a new white line is drawn. If the price falls below the previous line’s low price, a new black line is drawn. If the price does not rise above nor fall below the previous line, nothing is drawn.
How to use Line Break charts?
The Line Break charts present support and resistance levels and mention breakouts. The trading signals on the chart depends on the lines settings. As mentioned earlier, three is common settings for the lines. However, traders can adjust the value according to their preference.
Traders need to measure the closing prices of the current line and the two previous lines (depending on lines value). If the current closing prices are higher, there is a chance that the price will go higher, and traders may consider entering buy positions. Contrarily, if the current closing price is lower than the previous prices, there is a downward potential, and traders may look to go short. The stop-losses could be set closer to the entry point.
The breakouts can also surface on the Line Break charts. A breakout happens when the lines move in a specific direction within support and resistance levels. As the chart is independent from time, there could be fewer chances of false breakouts but they still do exist.
Traders could also look for price reversals. When the lines change their course, price reversals may occur. To confirm a reversal, traders can look for different chart patterns like a rising wedge or double top and bottom.
Line Break charts trading strategy
The simplest way to trade using 3 line break charts, is to wait until the market has made at least 3 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.
Although the 3 line break is the most popular chart, it’s also possible to build 2 line break, 4 line break, etc. charts, the difference being that a reversing line needs to break the lowest low (or highest high) of the previous 2 or 4 lines respectively. This allows us to tailor the strength of the reversal needed to declare a change in trend direction, or change in line color.
Line Break charts are usable for intraday, day-trading, and long-term trading. This can be beneficial for traders looking for an alternative to candlestick charts.
Line Break charts buy strategy
- Locate up lines after comparing current closing prices and previous closing prices.
- Wait for the up lines to appear.
- Enter the trade after the formation of up lines.
- Set a stop-loss close at the recent low from the entry point.
- Exit the trade when the lines change their course.
Line Break charts sell strategy
- Locate down lines after comparing current closing prices and previous closing prices.
- Wait for the down lines to form.
- Enter the trade after the formation of down lines.
- Set a stop-loss close at the recent high from the entry point.
- Exit the trade when the lines change their course.
Line Break charts conclusion
Line Break charts provide potential entry and exit points and can help to prevent less false breakouts. Traders can utilize technical indicators and chart patterns to confirm the direction of the trend. 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.
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