How to filter out the noiseIn this post I will demonstrate one of the techniques that you may use to filter unnecessary noise from the chart.
For that purpose we will use Three Line Break charting (invented in Japan) along with a Japanese trend indicator Ichimoku Kinko Hyo.
Line break charts were developed in Japan and popularized here by Jewish American author Steve Nison (the man who revolutionized technical analysis by introducing Japanese candlestick charting techniques to Western traders) in his book "Beyond Candlesticks" (2009). In that book, Steve Nison unveils the mysteries of four more of Japan's most closely guarded financial secrets - Kagi, Renko and Three-Line Break charts.
Three Line Break charts show a series of vertical green and red lines (bars); the green lines (bars) represent rising prices, while the red lines (bars) portray falling prices. Prices continue in the same direction until a reversal is warranted. A reversal occurs when the closing price exceeds the high or low of the prior two lines (bars).
The green and red bars on the price chart are called “lines”. Second, line (bars) changes are based on closing prices, not the high-low range. Third, Three Line Break charts evolve based on price, not time.
Each new closing price produces three possibilities:
1 A new line of the same color is drawn when the price extends in the same direction.
2 A new line in the opposite color is drawn when the price change is enough to warrant a reversal.
3 No new lines are added when price does not extend the trend or the change is not enough to warrant a reversal.
Good luck!
Roman
IC Finance
