Edition

IFTA JOURNAL
2017 EDITION
Table 9. Other four lines patterns tested with exit as
change of line or 3 lines in favor on three line break chart
High-Low Charts
We only considered closing prices while constructing Line
break chart which is the traditional way of doing it. Point &
Figure is another method of plotting noiseless charts. A.W.Cohen
(2) introduced High-Low P&F chart in his brilliant work. Same
construction logic can also be used in Line break charts. Three
line break High-Low charts ignore closing price and plot charts
only using high and low prices. Only high price is considered for
plotting if last line is bullish and only low price is considered if
last line is bearish.
It is natural that chart constructed with High-low price are
wider than chart plotted with closing prices. All above mentioned
setups are valid on these charts as well which can be back tested.
The length of line issue is minimised but there is another issue.
These charts are plotted using high & low prices and we don’t
know whether high has occurred first or low while plotting them.
Reversal line is not plotted when both meet requirement on a
particular day. For this reason it is better that only chart plotted
with closing prices are focused upon for back testing.
Charles Dow considered the daily close as the most significant
price and relied exclusively on them. The usual line chart that
plots only closing prices is one of the oldest and most important
method of plotting prices. Also, as Murphy argues, “Many
chartists believe that because the closing price is the most
critical price of the trading day, a line (or close only) chart is
more valid measure of price activity.” (3) Line break charts
filters noise from usual line charts and allow us to define setups
using combination of closing prices.
Timeframe
We considered daily closing prices for plotting. However, it
can also be plotted for intraday timeframes of any length. The
same way it is also possible to plot it using monthly, weekly and
yearly prices.
Other Reversal Values
Five, Four and Two Line Reversals
Charts can be plotted using other reversal values also instead
of usual three lines as a reversal. Four and Five line reversal
charts can be plotted and tested. Noise will be filtered further in
these charts and change of line formations becomes interesting.
But length of line issue will be magnified that limits their
practical utilisation, though some backtesting numbers are
encouraging.
Two line break charts are quite interesting and patterns
we discussed above are applicable to them also with few
variations. It has more to do with length of second line in a four
line structure. All these charts can be back tested in the same
manner.
One Line Reversal Charts
One line break charts are of separate importance and different
from other reversal values in nature. To an extent they deals
with length of line issue in a better manner. Reversal criteria of 3
is made that of 1 while plotting One line break charts.
The general rules for plotting a one line break chart are as
follows:
• If the price exceeds the previous line’s high price, a new
bullish line is drawn.
• If the price falls below the previous line’s low price, a new
bearish line is drawn.
• If the price does not rise above nor fall below the previous
line, nothing is drawn.
A One line break chart will produce more lines compared
to a Three line break chart. So there is more noise but then,
more information as well. Objectivity and possible combination
of lines remain advantageous and allow us to test various
occurrences and develop our understanding of market
behaviour.
One line break charts are more useful compared to Three
line break charts when very a wide line is produced in latter
charts or when the trend is horizontal in nature and one wants
to analyse the structure. Four line patterns logic doesn’t apply
to One line break charts. Change of line is more of noise in these
charts, but it remains to be seen whether the formation can
prove useful from a trading perspective. Table 10 shows the
back tested numbers of change of line formations on one line
break chart.
Table 10. Backtested numbers of change of line
formation on daily One line break chart
As expected, it is of little importance on these charts as well.
But swing breakouts seem more relevant being the most logical
formation on these charts. Breakouts will be little early and
there will be more occurrence comparatively. Table 11 shows the
backtested numbers of Swing breakout points using SAR method.
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