Big Experiment (part 2). Line Break Chart

28 авг. 2018 г.

BTCUSD
Dear friends,

I continue my big experiment with different chart types. In the previous training article, I described the advantages and disadvantages of Renko chart. After that, I was testing the signals, sent by Renko, and those, provided by common technical analysis tools, like MACD and moving averages, on different cryptocurrency pairs.
I analyze four-hour timeframe in my experiment.
Finally, after one week of tests, I can draw the following conclusions:
• The quality of Renko signals mostly depends on the right box size.
• MACD oscillator is quite good to find out the appropriate box size. You adjust the box size in the selected timeframe until there are as few false signals as possible, or there aren’t any.
• As Renko chart hardly indicates the minor sideways price movements, you can reduce the periods of moving averages by a few times, so that their signals won’t be too late.
• To filter false signals, sent by Renko, you also need to use candlestick chart at the same time.
• A perfect buy/sell entry point is when the signals in the candlestick chart coincide with the Renko signals.
An example of a perfect buy position:

An example of a perfect sell position.

Finally, I can conclude that Renko chart is an excellent instrument that will perfectly supplement any trading system. The drawbacks are the need to adjust the brick size to each timeframe and the time lags in signals, compared to the corresponding ones in the candlestick chart.
The next chart type in my experiment will be Line Break Chart.
Although it may seem complicated, it is quite simple to apply. It displays only the price moves that break through the last three closing price levels.
The default number of Line settings is three, but you can change it just like the Renko box size, in order to make the chart more or less responsive.
Unfortunately, I haven’t discovered the way to change the type of the levels displayed. I believe it would far more interesting to see not the closing price lines, but, rather, the highs or lows, because these movements provide the final signal to determine the trend direction. So, I really hope that someone will hear me and develop such an indicator ;))

To make it clearer for you how a Line Break Chart is built, let’s study it on a real example.
There are two charts of the weekly timeframe above. The candlestick chart is on the left. The Line Break chart is on the right.
I marked the analyzed zone with the green circle. You see, a long bullish candlestick emerged on July 16. It broke through the closing price levels of the three previous candlesticks (I marked close levels by numbers), and so there is a bullish bar in the Line Break chart (green). Besides, the bar’s high coincides not with the high of the Japanese candlestick, but with its closing level.
As you see, in this case, the opening level of a bar in the Line Break chart is always the closing price level of the previous bar.
The indicator alone sends quite simple signals.
1. A buy signal is when three consecutive bearish bars (down lines) are followed by a bullish one (an up line).
2. A sell signal is when three consecutive bullish bars (up lines) are followed by a bearish one (a down line).
Here, I should mention that many Line Break chart users suggest expecting an additional bar in the signal direction, following the reversal bar (breakout).
Therefore, if the pattern is not complete, and down lines are alternated with up lines, you’d better avoid trading.
As known, Japanese like creating names for their patterns, and this case is no exception.

For clarity, I presented the bullish pattern in the Line Break chart.
I marked three bearish bars with the red circle, Japanese call it Black Shoes.
The bullish bar, following three black shoes, is marked with the yellow circle. It is called Suit. A white suit means to buy, and a black suit means sell.
The line in the green circle is the confirming bar, it is called Neck.
Japanese say that you are to buy when the market “puts on black shoes and shows the neck in the white suit”, that is the market a kind of puts on a white bullish or a black bearish suit before it moves on))
It is important, how long is the Suit line; if it is not that long, a false breakout is likely to occur. It occurred in the first case, when the Suite was rather short.

In the BTCUSD price chart above, I present an example of a sell signal (similar to the bullish one), when the market has put on a black suit.
Basically, this pattern has a big flaw; by the time there is the Neck, a half or even the most of the general trend can be over.
To reduce the time lag, you can cut the number of break lines. In addition to this, I suggest doing the experiment with the standard indicators, MACD and moving averages.

In the Bitcoin/Dollar four-hour char above, you see that the Line Break chart sends the signal a little later. However, if there is the price sideways move (marked with the red circle), the indicator sends many false signals and is not efficient. There, MACD is of help. In case with the Line Break chart, the indicator doesn’t suggest strong volatility and indicates the sentiment rather definitely; it doesn’t feature the same in the Japanese candlestick chart.

Summary:
The Line (Three-Line) Break Chart is obviously worth studying and can serve as a confirming indicator of the trend reversal. Like Renko chart, Line Break can remove the noise, resulted from minor volatility during short time periods; however, it is likely to send many false during a long sideways trend inside a wide price range. Moreover, I don’t think it is right to analyze the close levels to spot the breakout, as, according to technical analysis, the more important levels during the price breakouts are the highs or lows for previous periods.
To study the indicator in more detail, I’m going to test in practice, applied to different trading instruments. I will present the results of my tests, traditionally, the in the next educational post.

I wish you good luck and good profits!
PS. If you agree with the forecast write “+” in the comments, if you don’t agree, put “-”. If you liked the post, just write thank you, and don’t forget to share the post. It is easy for you and I will be very pleased :)