Three-line break charts originated in Japan during the 19th century and it is said that this technique was used in rice trading. This is another old form of charting originating from Japan along with the likes of Renko, Kagi and Heikin-ashi charts. Line-break chart was introduced to the western world by Steve Nison in his book Beyond Candlesticks.

These are known as Three Line break charts because of the default reversal value of three that is typically used. But these charts can be plotted using any other reversal value too. Hence, the appropriate generic name would be Line-break charts. They are also known as three-step new price, three-step reversal charts, Box reversal charts, Line reversal charts or Three box reversal charts.

Three line-break is a widely used name so we will stick to that. They are in widespread use in the Far East but not so much prevalent elsewhere. But this charting method is available in most of the charting platforms. Line-break chart belongs to the One-dimensional charting family such as P&F, Renko and Kagi. These time-independent charts plot only price and new price action gets captured in the chart only when there is price move which meets a certain criterion. This genre of charts eliminate noise to a large extent and plot charts with easily readable patterns.

P&F charts plot prices vertically based on a user-defined box-value and reversal value. They are more dynamic in nature and show swing price patterns. Renko charts are plotted diagonally and the user has to define only the brick-value while plotting them. They also divide price moves into number of bricks and show the swing patterns. Line break charts need only one variable to construct the chart which is known as the reversal value.

Have a look at image below. These are the closing prices of a stock.

If we connect these closing price and draw the line, it becomes a line chart.

Instead of connecting the dots and drawing the line chart, we can connect the two closing price and draw the box as shown below.

This way, we can draw a box of all closing prices.

Let’s fill them with Green and Red color. If price is bullish, color of the line is bullish and if price is bearish color of the line is bearish.

This way, we can see price trending using boxes instead if lines.

See the price shown in the below chart. 

If you notice, there are the prices within the previous box. If we remove them from the charts, it will remove the noise from the chart and capture the price information that is relevant.

Let’s remove those dots from the chart and connect the boxes and that becomes Line-break chart.

Each box in the above chart is known as Lines, and this is how Line break charts are constructed.

The reversal value in above line-break chart is one. Meaning, we draw the bearish reversal line if price falls below the low of previous line and bullish reversal line if price goes above the high of previous line. Usually, reversal value of three is considered as the default setting which is why it is popularly known as the Three-Line Break charting method.

Be familiar with word ‘line’ now. In the entire blog series Line or lines mean these boxes connecting two prices.  The name is unfortunate in this context and can be confusing initially but we must use it because that is what they are traditionally called. But not to worry, you will be comfortable with these nomenclatures once you understand their usefulness and unique properties.

Construction

Line Break charts display a series of vertical boxes (lines) that are based on changes in price. As explained above, normally closing prices are used for plotting these charts. It is possible to use high and low prices to construct the Line-break chart, but we will discuss that later.

Rules for plotting three-line break charts are as follows:

• If three consecutive bullish lines are formed, then a new bearish line is drawn only if price fall below the lowest point of the last three bullish lines.
• If three consecutive bearish lines are formed, then a new bullish line is drawn only if price rise above the highest point of the last three bearish lines.

Let me explain the construction of Three-line break charts step by step.

Construction of Three-line break chart

Below table is a list of prices used for construction of Three-line break chart

First thing to do is to decide whether to begin with bullish line or bearish line. A line cannot be plotted with single price hence second price is required to decide the same. The 2nd price in the table is 101. Hence bullish line is plotted from 100 to 101. See below Figure.

Third price is 104 which is higher than previous lines. So second bullish line is plotted as shown below.

High price of current line is 104 and low is 101. The 4th price is 105 hence one more bullish line gets plotted.

High price of current line is 105 and low price is 104. Reversal line in Three-line reversal chart is plotted when price breaches extreme price of previous three lines. Bearish reversal line gets plotted when price goes below the low of last three lines. Three line low in this chart is 100. Bearish reversal line will not get plotted unless the price falls below 100.

The 5th price is 108 and this will result in another bullish line as shown below.

High price of the current line is 108 and low price is 105. Reversal price now is 101 being the lowest price of last three lines. The 6th price is 112 hence another bullish line is plotted.

Reversal line now stands at 104 being the lowest price of last three lines. The 7th price is 108 hence bullish line cannot be drawn. As the price is not below 104, a reversal cannot be plotted either. Hence the chart remains unchanged.

The 8th price is 103 which is below reversal price. Hence bearish line is to be drawn as shown below.

High price of current line is 108 and low price is 103. Bearish line will get plotted if price keep going down below 103. Reversal price to plot bullish line is 112 being highest price of last three lines.

Remaining prices can be plotted with the same rules. Below Table shows the High price, Low price and Reversal price against each price.

Below figure shows the final Three line break chart of construction exercise.

Hope you got the idea about how three-line break charts are constructed. Technique is that, the trend is bullish unless price falls below the lowest point of last three lines, and bearish unless it goes above last three lines on the Line-break chart.

How about using other reversal values? While technique of using them will be discussed later, it is possible to plot charts with other reversal values using same table of price.

Table below shows prices for construction of Line-break chart using other reversal values.

Five-Line break chart

If reversal value of Five is used instead of Three, the chart would be called as a Five-Line reversal chart.

Table below shows the High price, Low price and Reversal price of every line against each price.

Below Figure shows the final construction of Five line break chart from the above table.

Four-Line break chart

Below is a Table showing the High, Low and Reversal price of every line against each price.

Below Figure shows the final construction of Four-line break chart as per the above table. 

Two-Line break chart

Table below shows the High price, Low-price and Reversal price of every line against each price.

Figure below shows the final construction of Two-line break chart from the above table. 

So, you must have got the idea about how Line-break charts are plotting using different reversal values.