Three Line Charts
Like other Japanese cousins (Kagi and Renko), the Three Inline charts filter out noise by focusing solely on price changes. The lines do not change unless the price changes by a certain amount. Unlike Point and Figure charts that use a fixed box size, this amount depends on the spacing of the last 2 rows. This range can vary considerably. The ability to filter noise makes these charts particularly useful for identifying underlying trend. Important ups and downs are easy to spot. Armed with this information, graphists can identify uptrends with higher peaks and higher lows or downtrends with lower and lower peaks. As with all graphic techniques, graphic artistsThree Inline charts, invented in Japan, ignore time and change only when prices move a certain amount (similar to Point and Figure Charts). Three Line Break graphs show a series of vertical white and black lines; white lines represent rising prices while black lines indicate falling prices. Prices continue in the same direction until the reversal is guaranteed. A reversal occurs when the closing price exceeds the high or low of the previous two lines.
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Before looking at the construction details, a few explanations are needed. First, the black and white bars on the price chart are called "lines". Second, line changes are based on closing prices, not high-low range. Third, the Three In-Line charts evolve with price, not time. The first chart below shows the 85 candlesticks or trading days from March 21 to July 20. The Three Lines chart concentrates this price action on 44 black and white lines. This technique filters out noise, focusing only on price movements that seem important.
Two Line Reversal
Each new closing price generates three possibilities.
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When the price moves in the same direction, a new line with the same color is drawn.
When the price change is enough to warrant a reversal, a new line in the opposite color is drawn.
New lines are not added when the price does not extend the trend or the change is not sufficient to warrant a reversal.
The higher or lower of the previous two lines determines the point of inversion. If the last line is black (down), the top of the last two lines indicates the inversion point. A close above this high requires a white line to indicate the price reversal. Note that only the last line should be black (down). The line just in front of this black line can be either white (up) or black (down). It is the lowest level of these two lines that defines the opposite point. The table below shows Dell Inc (DELL) with three 2-line inversions; the first two are formed by two black lines and the third by a white line and a black line. Horizontal red lines mark the opposite point that the white line crosses to create the reversal.
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If the last line is white (up), the bottom of the last two lines indicates the return point. A close below this low will need a black line for the price to reverse. Note that only the last line should be white (up). The line immediately in front of this white line can be either white (up) or black (down); It is the lowest of these two that decides the point of return. The table below shows United Parcel (UPS) with three 2-line inversions. The first and third inversions have the black line / white line combination, while the middle inversion shows two white lines. Horizontal green lines mark low or reversal points that the next black line crosses to create the reversal.
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Three Line Invert
As the name suggests, the Three Line Break Chart is all about breaking three lines. Two lines may reverse in a trading range or as a continuation of the larger trend. Three Line Break, on the other hand, refers to a stronger move that may signal a trend reversal. An uptrend reversal occurs when three black lines are formed and a single white line breaks the top of these three lines. A bearish reversal occurs when three white lines form and a single black line breaks below these three lines.