Trends & Turnarounds – 1-2-3 Reversal
Most Frequent Problems with Trend Lines
1. How to define the trend line is effectively broken?
2. How to define a change in trend?
1-2-3 Reversal, provides a technical theory of trend reversal and makes the analysis consistent
What is 1-2-3 Reversal?
① The trend line has been breakthrough;
② The trend is no longer making new highs/lows;
③ In an Uptrend, the price falls through the low of the previous rally; In a Downtrend, the price breaks above the previous pullback high.
If only rules ① and ② are completed
→ the trend may not change
If ①, ②, and ③ are all established
→ the trend has a high probability of reversal
Kind of reversal
Risks in 1-2-3 Reversal
- All methods would never be 100% accurate
- It is easy to lose the effectiveness in a volatile market
How to Mitigate Risks
- Choose the financial products with high liquidity, few sudden and sharp reversals;
- Avoid markets that are extremely sensitive to news (eg: gold, crude oil);
- If the judgment were incorrect, recognize your error and Stop-Loss immediately.
Pros & Cons of the 1-2-3 Reversal
Pros:
Simple and effective trading method, if used carefully, the probability of success is much higher than failure
Cons:
If you adopt the 1-2-3 Reversal solely, after realizing that the trend has reversed, you have actually missed a large segment of the volatility.
How Analyst Uses It – ex. of Bull Trend
(1) When the price falls below the uptrend line → All the long orders will appear, but no short positions will be held for the time being
(2) Rebound backtest trend line → go Short;
※If it pulls back to the top of the trend line → Stop-Loss directly.
(3)Falling below the starting point of the rebound → Raise the volume on Short order;
If the big black candle breaks through the trend line directly → do not have to wait for 1-2-3.
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