A Three Line Break works by measuring the strength of a rally or sell off compared to previous bars.
If the price makes a new high compared to the high of the previous bar, then a new bar (green in this case) is constructed. If the price makes a new low compared to the low of the previous bar then a new bar is made (red in this case).
The caveat of Three Line Break charts is when three consecutive colors are made. If the chart builds three green bars, then the price must reverse below the low extreme of the series before a red bar is constructed. The same is true for the downside. If the chart builds three red bars, then the price must be able to surpass the high extreme of the series before a new green bar is built.
The (3) in Three Line Break refers to the reversal amount that a series must complete to be considered a true reversal.