Profit from trend reversal: 123 Rules and Tips for Share

Profit from trend reversal: 123 Rules and Skills Sharing

The unpredictable market changes have brought about a variety of trading methods, but the key to making a profit in trading is to find a strategy that suits you. Many traders are familiar with and have applied the 123 Rule, a technical analysis method based on Dow Theory, used to confirm trend reversals and as a signal for opening positions.

What is the rule of 123?

The trend direction of the 123 rule is somewhat similar to the shape of the English letter “N”, which is used to identify the pattern of trend reversal. For example, in a continuous decline, the price retreats after encountering resistance (step 1); after the retracement is over, the price falls again but does not fall below the previous low (step 2); the price then rebounds and breaks through the previous high (step 3), which marks a possible reversal of the trend.

How to apply the 123 rule?

1. Confirm the trend reversal:

Using Dow Theory, the pullback in the upward trend does not break the previous low, and continues to break the previous high; the pullback in the downward trend does not break the previous high, and continues to break the previous low. When an opposite 123 structure appears at the end of the trend, it can be regarded as a signal of a trend reversal.

2. As an entry signal:

The breaking point of the rule 123 (step 3) can be used as an entry signal. In actual combat, this method can also be used in combination with charts of different time periods to achieve a more accurate grasp of trading timing.

Precautions when using the 123 rule:

Applicable to different periods:The 123 rule can be applied to different time periods, such as daily, hourly, minute lines, etc.

Pin-bottom reversal patterns:Many top-bottom reversal patterns, such as double tops and double bottoms or head and shoulders top and bottom, may contain the structure of the 123 rule.

Practical application: Try to enter the market at the low point of the callback in step 2. You can capture opportunities in the early stage of the trend reversal, with smaller stop loss and higher profit and loss. Increase positions when breaking the position in step 3 can improve trading efficiency.

The 123 rule is a relatively practical trading tool. Whether it is a steady trader or an investor who prefers radical, you can find your own trading rhythm in a changing market by flexibly using the 123 rule. But it is worth noting that any trading strategy is not omnipotent, and the 123 rule is no exception. Traders still need to comprehensively consider market analysis, risk management and personal trading style before making trading decisions.