Recently, I’ve been revisiting an old-school technical tool called the 123 Rule. Honestly, this methodology is quite friendly to both beginners and advanced traders.

The core logic isn’t complicated; it’s about confirming trend reversals through three key points. The first step is breaking the trendline—whether in an uptrend or downtrend, once the price breaks through the existing trendline, it signals a potential change. The second step is a pullback or retest, but with a crucial detail—during an uptrend, the pullback shouldn’t break the previous high; during a downtrend, the retest shouldn’t break the previous low. The third step is the actual confirmation of reversal: in an uptrend, a break below the previous low; in a downtrend, a break above the previous high.

I’ve noticed many people overcomplicate the 123 Rule derived from Dow Theory. In essence, it’s about forming a structure of rise-fall-rise or fall-rise-fall at the top or bottom, which breaks the definition of a trend—higher highs and pullbacks that don’t break lows. Once this structure is broken, the trend reversal is confirmed.

In practical trading, I mainly use it for three things. First, to confirm the trend direction—this is the foundation of trading. After a continuous bullish run, if a reverse 123 pattern appears, it indicates a shift to bearish; the opposite is also true. Second, as a signal to close or reduce positions, because the 123 pattern appears more frequently than double tops/bottoms or head and shoulders, allowing for more timely profit-taking. Third, as a standard entry point—breakouts often signal the start of a move, and the breakout points in the 123 pattern are very clear, making it highly practical in real trading.

There’s also an advanced application: combining it with the RSI indicator. Simply looking at RSI overbought or oversold zones can be problematic—first, the zones are too broad; second, in a trending market, the indicator can become dull and ineffective. But if you use the 123 Rule to filter trading signals, you can enter more precisely within overbought or oversold areas and avoid some noise signals.

In short, simplifying complex trend recognition into three steps of 123 makes this methodology very practical. I’ve seen significant improvement using it myself. I recommend interested friends take the time to learn it thoroughly; combining it with other technical indicators can yield even better results.