Line charts. The method of Three Line Reversals

A line chart is plotted as a chain of white and black lines. Like the Point and Figure charts, a line chart is related to one dimensional charts. It depicts only the price change without a time coordinate. A new white line is formed when prices rise above the level of the previous high, and a black one is formed when the prices fall lower than the prior low. Thus, plotting charts for the Three Line Reversals is one of the filtering methods.

Image 1. Line chart.

According to the Three Line Reversals method, a sell signal is formed when a black line appears following a sequence of at least three white lines. Similarly, when a white line appears after a series of at least three black lines, it serves as a buy signal. If black and white lines alternate, it means that there is no trend. The market fluctuates in a tight range, so there is no use of taking any actions.

Mr. Nison recommends using this method along with the classical Japanese candlesticks. Importantly, this method is related to the trend tracing indicators, so its signals may lag, appearing after the market reversal.

The sensitivity of the method can be modified by changing the required minimum of lines in one-colored series of lines prior to the reversal moment. If we take two lines instead of three, we will enhance the sensitivity. Meanwhile, the shift to 4-10 lines in the sequence will help us define only long-term trends.