Three-price break

The three-price break signal is based on closing prices. Each successive close is classified as either a “new price” in trend, (e.g., a higher close in an uptrend), a “break” in trend (a close below the “break price,” which is the closing price three “new prices” back in an uptrend), or a “non-event” (neither a new price nor a break price).

A long trend remains intact until broken by a close below “three new prices” back in the trend — that is three “new price” closes back in trend (not three periods back). Because the method ignores non-event periods and counts only new prices in trend or breaks in trend, a trend that has reached “three new highs” can include many more than three trading periods.

At the end of 2004 the market had made 17 new daily high closes and rallied to 1.3628, with the break price being a close below 1.3506 (the latter being the 14th new high in trend — three before the current new high in trend). On the first trading day of the year, the market closed at 1.3461, thus going short on the three-price break, with the new break price being the prior trend high close at 1.3628. The market proceeded to make eight new closing lows with a maximum gain of 539 pips, before reversing long on a close above 1.3054.