The 123 Rule is simple yet practical, making it a powerful tool for Newbies and newbies to get started quickly. It simplifies trend identification and trading decisions into three steps, making it very easy to understand.

First, "1" refers to breaking through the trend line. In an upward trend, the price breaks through the upward trend line; correspondingly, in a downward trend, the price breaks through the downward trend line. The "2" stage means that in an upward trend, the price pulls back but does not break the previous high; similarly, in a downward trend, it retraces but does not break the previous low. Finally, the "3" stage is characterized by the price breaking below the previous low in an upward trend, and in a downward trend, the price retraces and then breaks the previous high. Meeting these three rules indicates a trend reversal, which is a key moment for formulating trading strategies. Interestingly, the sequence of the 123 rules is not fixed and can be interchanged.

Regarding the top reversal: the price first creates a new high (Point 1), then the price retraces to form a minor low (Point 2), then rises again but fails to break the previous high (Point 3), and finally breaks below the minor low (Point 2), marking the confirmation of a trend reversal. Similarly, a bottom reversal occurs when the price creates a new low (Point 1), followed by a price rebound forming a minor high (Point 2), then declines again but does not create a new low (Point 3), and finally breaks above the minor high (Point 2), confirming the trend reversal.

Do you feel that the framework of the 123 pattern is very familiar? It basically takes advantage of the rise and fall structure and the trend reversal mechanism in Dow Theory: when the market is rising but does not break the high, and during the pullback it breaks the previous low, this reflects that the definition of the trend has been broken, thus indicating a trend reversal.

The application of the 123 pattern is sometimes very practical: first, to confirm the trend; second, as a closing or reduction signal; third, as an entry mark; and fourth, in combination with the RSI indicator. For trend traders, identifying the reverse 123 pattern is a good opportunity to close positions. It appears frequently but is not limited to static structures like double tops, double bottoms, or head and shoulders patterns, making it an important reference for trend-following operations.

In terms of entering the market, the 123 pattern serves as a breakout signal, marking the moment when the market starts. In practice, it has high feasibility. By connecting with RSI overbought and oversold conditions, it reduces the risk of consecutive stop-losses and increases the success rate of trades.

This set of rules works even better when used in conjunction with other technical indicators. You can continuously learn and apply them to improve your trading skills. I hope we can all make progress in our trading!

Of course, here's a little tip: This article may contain third-party insights and does not constitute financial advice. Any sharing does not guarantee specific returns, so be sure to operate with caution. 🙌