› The rule ‘1-2-3’

The rule ‘1-2-3’

Three events have to happen for the trend to be changed. The changes might cause different trend criteria to evaluate as well.

Three events
Source: Gizmodo UK

The trend line has to be breached - prices must cross the trend line drawn on the chart.

Prices have to stop making higher highs in the uptrend and lower lows in the downtrend. For example, in an ascending formation, after insignificant selloff, prices can get higher again but they would fail to get higher than the previous maximum or just break the maximum and pull back again. An opposite situation is applicable to the downtrend. This case is often described as a test of the maximum or minimum. And it often but not always happens when the trend is in the change process.
When it does not happen, the price action is usually driven by important news which force the prices to jump up and down and to move disorderly compared to a ‘normal’ price action.

Prices have to exceed higher than the maximum of the previous short-term secondary growth in the downside trend, and lower than the minimal of the previous short-term secondary decrease in the upside trend.

The point where all three events occur causes a creation of the confirmation for the Dow theory which explains the trend changes. Two out of the three events make the change to become more probable. Any of the first two events is a sign of potential change in the trend. While three of the three events strongly indicate that the trend has changed. All you need to do in order to see the trend changing is you need to move all of the three events in a graphical form to the chart. First step is to build the trend line. Then you draw two horizontal lines which indicate extreme levels. In the case of downtrend, the first line has to come through the current low and the second horizontal line should come through the maximum of the previous secondary growth. In the case of upside trend the first line has to come through the current high and the second horizontal line should come through the minimum of the previous secondary slide.

If the prices cross the trend lines, we should mark that cross point with ‘1’. If the prices test the previous maximum or minimum, meaning that if they approach that horizontal line of that extreme points and then cannot move further, this point whould be markets as ‘2’. If the prices move further through the horisonal low or high levels, then that point has to marked as ‘3’. In case if two out of the three conditions are accomplished, that would mean that the chances for the trend to be changed are quite high. In case if all of the three conditions are in place, the trend has already changed and the price action will be contiued in a different direction.

Read also

You have successfully registered

You can choose the needed type of account at any time!