The 123 System
This is an incredibly powerful yet simple pattern that can turn your trading around. It is effective with any market and has a very high accuracy rate. This is without a doubt one of the best chart set-up patterns you will see.
- To spot the potential market bottom of any securities price, watch for a new lowest price in the current Downswing (point #1).
- Watch for price to rise from point #1, and then drop again (leaving behind point #2). As price drops from point #2 it approaches (but never reaches) point #1. Price then starts to rise, forming point #3.
- However, if price drops below the point #1, you need to start over. If the price can't break the #1 point, the trend will very likely change.
- When price rises towards point #2, place your open order to go long (buy) at a price somewhere above point #2. At the same time, also place your stop-loss order slightly below either point #1 or point #3. When price breaks above point #2, this is a bullish signal that suggests a change in trend is likely to occur. If price advances, your open order is activated and you are in the market.
When you are in the market, call your broker and tell them to move your stop-loss up as price moves up in your favor and profit accumulates. Keep raising that stop-loss point to either further limit your losses, or to help lock in any profit you've already earned.
Placing your stop-loss too close will cost you potential profit. The more profit you accumulate, the farther behind you can afford to place your stops. Ideal places to put your stop-loss order are at a previous support point on the chart. A 1-2-3 Bottom can actually be a double-bottom. This is where point #3 equals but doesn't exceed point #1.