Lately, I've been using the 123 Rule to filter trading signals. To be honest, this method is indeed simple and powerful, especially suitable for identifying clear entry and exit points in complex market conditions.

First, let me explain why I find the 123 Rule so practical. Essentially, it’s a structure of rising and falling waves formed at the top or bottom—up, down, up; down, up, down. It sounds simple, but the underlying logic actually originates from Dow Theory. What is the definition of a trend? An uptrend is characterized by higher highs and higher lows, with pullbacks not breaking the previous low; a downtrend is marked by lower lows and lower highs, with rebounds not surpassing the previous high. Once this definition is broken, it indicates a trend reversal. The 123 Rule is a tool to catch this turning point.

How exactly is it used? In an uptrend, the first step is when the price breaks through the upward trendline, the second is a pullback that doesn’t break the previous high, and the third is a break below the previous low. When these three steps occur, the trend reversal is confirmed. The logic is the same for a downtrend, just reversed. In practical trading, I find that the beauty of the 123 Rule is its high occurrence frequency—much higher than double tops, double bottoms, or head and shoulders patterns—making it especially timely for confirming trend changes.

I currently have three main uses. The first is as an exit signal. In trend trading, once I see a reverse 123 pattern forming, I close the position immediately to avoid being caught in the opposite trend. The second is partial profit-taking. When the trend is still ongoing but the 123 Rule begins to appear, I reduce my position to lock in some gains, which helps stabilize my mindset. The third is precise entry. The break points in the 123 Rule are easy to identify, with clear levels, making it highly feasible in real trading. I often enter immediately after confirming the third step breakout.

There’s also an advanced approach—combining the 123 Rule with the RSI indicator. The RSI’s overbought and oversold signals have a problem: the signal zones are too broad, and in trending markets, they can become dull and ineffective, leading to consecutive stop-outs. But if we use the 123 Rule to filter and confirm signals, we can enter more precisely within the overbought or oversold zones, and also filter out some noise when RSI signals fail, greatly improving win rates.

Honestly, once you master the 123 Rule and combine it with other technical indicators, you can create many practical trading strategies. I’ve found this method particularly useful in my trading now, and I recommend everyone to study it as well—it should be helpful for your trading.