If things are clear so far, the upcoming discussion on Narrow and Wide lines would be more logical.
As the name suggests, narrow lines are basically the lines with relatively narrow size. An instrument that is going up and forming new higher prices will keep producing continuation lines. A marginal higher price will produce the narrow line. Below image explains it.
Narrow lines are usually the continuation lines. Their occurrence is explained in the below image.
In uptrend, new line will get plotted in the Line-break chart when price goes up (Continuation line). Hence, uptrend is a series of bullish continuation line. When price marginally goes up, it produces a narrow continuation line. Similarly, when the price marginally falls in the downtrend, it produces bearish continuation lines.
Below are the two important things about Narrow lines:
- Usually, they are continuation lines. They appear during strong trends.
- They show small price move in the direction of trend. It shows that though price is moving, the rate of change is reducing.
There is another possibility of where narrow lines may occur. A narrow line that takes higher number of days to print. This indicates that the price went through a period of consolidation before producing the bullish narrow line.
The formation of narrow lines brings reversal level closer and the continuation signal becomes affordable.
Reversal narrow lines are not common and indicate serious price consolidation or lack of interest among participants.
Narrow lines also mean low volatility in the instrument. Periods of low volatility are followed by high volatility. Hence, narrow lines are expected to be followed by wide lines.
Series of narrow lines indicates an exhaustion of the trend. They are expected to be followed by the trend.
Wide line is a large lengthy line, think of it as a wide range candlestick. Reversal wide lines are usual because price is required to breach the extreme levels of previous three lines to trigger a reversal. Continuation wide lines indicate strong trend.
Wide lines with lesser number of days indicate strong trend. Wide lines with a higher number of days indicate that the price has produced a breakout after moving in a range. More about this phenomenon will be discussed later.
In brief, Wide line with higher number of days indicate strong move after consolidation, wide lines with lesser number of days suggest strong continuation prices, Reversal wide lines usually occur with higher number of days and Reversal wide lines with lesser number of days indicate strong reversal.
Objective definition of wide and narrow setup is difficult. The concept is basically relative and subjective in nature. Traditional concepts of NR4 and W4, used in traditional technical analysis, can be of help here. NR4 is basically a usual price-time chart setup where current range (difference between high and low price) of price is narrowest among last four ranges. Same way W4 price indicate widest range of price among last four.
Range of every bar or candle is difference between its high and low price. NR4 is narrowest range among last 4 bars. A line in line break chart is a difference between two prices which can be considered as range of every line. NR4 in case of Line break charts is narrowest range of line among last 4 lines. Similarly, W4 is widest range of line in the last 4 lines. Let us discuss them further.
NR4 and NR7
NR4 Line in the Line-break chart is the narrowest line in last four lines. See below image.
NR7 is the narrowest line in last seven lines. See the image.
NR7 is also NR4. This definition helps us in objectively defining the pattern. NR4 and NR7 line shows the range contraction and a drop-in rate of change. It can indicate a sign of exhaustion or a pause in the trend.
Series of NR4 or NR7 pattern indicates exhaustion. Continuation narrow lines can give opportunity to participate in the trend with an affordable stop-loss.
Reversal narrow line is not common. It indicates a narrow range price consolidation. It could be also because of liquidity issues or lack of interest amongst market participants for the instrument.
W4 and W7
W4 Line is the widest line in last four lines.
W7 is the widest line in last seven lines.
W7 is also a W4. Wide lines indicate strong trend. Normally, reversal lines are wide lines in a three-line break reversal chart because price would breach extreme price of last three lines to qualify for the reversal. Continuation wide lines show strength of the trend. You will find a lot of continuation wide lines in a strong trending move.
Wide line is expected to be followed by narrow lines, but it may not happen immediately in strong and established trends. Strong trend usually produces series of wide lines.
Below is an example of NR4 and W4 lines applied on the Line-break chart.
You can select NR4, NR7, W4 and W7 patterns in TradePoint to plot them in the chart or scan for such occurrences from the Line Break scanner. Below is a chart of BAJAJFINSV showing narrow lines.
Most of the Narrow lines shown in the above chart are NR4 as well as NR7 lines. W4 and W7 lines are plotted in the same chart shown below.
Visual observation will not make us see pattern A as a wide line, but it is widest line in last 4 lines and hence qualified for W4 pattern. Pattern B is a strong wide line that breached multiple bottoms. Pattern C and D are strong continuation wide lines showing strength of the trend. Pattern D is followed by narrow lines indicating that the rate of fall is reducing. Pattern E is a reversal wide line that went above previous multiple highs. Pattern F is a Wide line followed after couple of narrow lines in the four-line reversal pattern.
Below is a chart showing number of days below the chart.
Plotting number of days in the chart would give us idea about lines where price spent more time. Observe circled price patterns in the above chart.
Below is a chart of ADANIENT along with number of days.
Pattern A is a bullish trend reversal pattern. Pattern B is a continuation narrow line pattern, but price remained in that range for many number of days. Pattern C is a bearish trend reversal that immediately occurred indicating a sharp price reversal.
This takes us back to our earlier discussion about continuation and reversal price patterns seen along with number of days. Now we have narrow and wide lines as well. Below chart would give a clear idea.
A = Tight range sideways trend in direction of trend
B = Narrow rate of change, weakening momentum
C = Wide range consolidation trend in the direction of the major trend
D = Strong momentum
E = Price remained in a tight range consolidation before reversal
F = Narrow range consolidation immediately followed by reversal
G = Reversal after a pattern of accumulation or distribution
H = Strong V, A shape reversal
In this chapter, I explained in detail about length of lines and how it can be associated with narrow line to read the price and time pattern.
We seek confirmation after formation of the pattern. It tells about the follow-through price action.
See below image.
Pattern A is a bullish trend reversal line. Pattern B is a bearish shakeout. Both were followed by a reversal pattern immediately. Pattern C is a bullish expanding pattern. All these are four-line reversal pattern. Pattern C is followed by another bullish line at D.
Pattern D is a confirmatory line.
A confirmatory line tells us that momentum is intact and helps in planning the trades.
Any important reversal or continuation pattern followed by another line is known as a confirmatory line.
Below is a chart of Nifty bank showing the confirmatory lines.
A line followed by major reversal line is known as a confirmatory line.
Even a continuation wide line, or any other major breakout line followed by another line can be known as a confirmatory line. This definition will help us in designing trade setups going forward.
Combination of lines
Steve Nison explained ‘Shoe, Suit and Neck’ pattern on the Line-break charts in his book Beyond candlesticks.
Let’s call it SSN pattern. Small bearish line followed by a strong bullish reversal and a short bullish line is a bullish SSN pattern. Small bullish line followed by strong bearish reversal and a short follow-through line is a bearish SSN pattern.
We can make it objective by defining it using concepts we have discussed so far.
Bullish SSN pattern
- Bearish Narrow line
- Followed by bullish trend reversal pattern
- Followed by a bullish confirmatory line
Bearish SSN pattern
- Bullish Narrow line
- Followed by bearish trend reversal pattern
- Followed by a bearish confirmatory line
Confirmatory line should not be a wide line.
TradePoint can help you to plot and back-test the pattern.
There are more such type of patterns that can be designed and testing using combination of lines. We will discuss more about them.
Next chapter talks about an interesting way of projecting the lines.
Click here to read next chapter.