The 123 rule was proposed by Victor Sperandeo in his classic work (Market Speculation Principles) as an important method to help us identify trend reversals, especially applicable to the cryptocurrency market. Below, I will explain this rule in an easy-to-understand way to help you better understand how to apply it in the crypto market.
What is the 123 rule?
The 123 rule is used to help us identify changes in market trends. This rule primarily confirms the possibility of a trend reversal by observing price movements. Specifically, the 123 rule has three key points, and we should focus on at least two of them. Only when both conditions are met can we assess the potential change in trend.
Three key points of the 123 rule
Trend line has been broken
This means the current market price has broken through previous support or resistance levels, and the trend may reverse. For example, in a rising trend, if the price breaks through the previous support level, it indicates a potential shift to a downward trend.The upward trend no longer makes new highs, or the downward trend no longer makes new lows
In a clear upward trend, if the price starts to fail to create new highs, or in a downward trend, the price starts to fail to create new lows, this may signal trend weakness.Price breaks down below short-term pullback lows, or breaks above previous rebound highs in a downward trend
If in an upward trend, the price breaks down below previous short-term pullback lows, or in a downward trend, the price breaks above previous rebound highs, this usually indicates a change in market sentiment and an increased likelihood of a trend reversal.
Upward trend (illustration):
1. Upward trend line has been broken;
2. Upward trend no longer makes new highs,
3. In an upward trend, the price crosses below previous short-term pullback lows
Downward trend (illustration):
1. Downward trend line has been broken;
2. Downward trend no longer makes new lows;
3. In a downward trend, the price crosses above previous short-term rebound highs
How to apply the 123 rule?
Trend Breakthrough Confirmation
If the market is rising but the price fails to break the previous high, or if the price breaks the support level, it may indicate a weakening bullish momentum and an increased risk of a reversal.Gradually validate trend reversal
If the above two points occur, and the third point is also met, meaning the price starts to break down below short-term lows or break up above short-term highs, then the probability of a trend reversal is very high. At this time, consider adjusting your trading strategy.
Practical application of the 123 rule
In the crypto market, price fluctuations are significant, and signals of trend reversals often appear amidst abrupt changes in market sentiment. By using the 123 rule, traders can more accurately judge market turning points and reduce the risk of blind operations.
For example, if you see the price breaking a key support level in an upward trend and failing to make new highs, and the price starts to pull back near previous lows, following the 123 rule, you can start being cautious about a trend reversal and prepare for risk control.
Summary
The 123 rule is not a universal indicator, but it can serve as a strong signal for trend reversal. As long as you master the skills to identify trend reversals, you can better protect your funds amidst the volatility of the crypto market and seize potential profit opportunities. For beginners, learning the 123 rule can help you make more rational judgments about market trends and avoid blindly following the market's ups and downs.