1-2-3 Top
Every commodity has only one high point and only one low point during each year. The 1-2-3 Top and 1-2-3 Bottom technique is used to spot major market tops and bottoms. When a market makes a new 12-month high or 12-month low, it's a signal to start monitoring that market's price trend for a change, looking for a trend reversal.
1-2-3 Top
To spot the potential market top of any futures price, watch for a new highest price during the past 12 months (point #1).
Watch for price to drop below that point #1, and then rise again (leaving behind point #2). As price rises from point #2 it approaches (but never reaches) point #1. Price then starts to drop, forming point #3.
However, if price exceeds the #1 point, you need to start over. This can happen when a head-and-shoulders pattern (described shortly) develops. If the price can't break the #1 point, the trend will very likely change.
When price drops towards point #2, place your open order to go short (sell) a futures contract at a price somewhere below point #2. At the same time, also place your stop-loss order slightly above either point #1 or point #3. When price drops below point #2, this is a bear signal that suggests a change in trend is likely to occur. If price declines, your open order is activated and you are in the market.
When trading on the short side, call your broker and tell them to move your stop-loss down as price moves down in your favor and profit accumulates. Keep lowering 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 to the current price 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 resistance point on the chart.
The ideal time span for the 1-2-3 Top or Bottom price pattern to develop should be at least two weeks or more, otherwise it's too far, too fast!
1-2-3 Bottom
To spot the potential market bottom of any futures price, watch for a new lowest price during the past 12 months (point #1).
Watch for price to rise above 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 exceeds the #1 point, you need to start over. This can happen when a head-and-shoulders pattern (described shortly) develops. 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) a futures contract 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 rises above point #2, this is a bull 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 trading on the long side, 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 Top or Bottom can actually be a double-top or double-bottom. This is where point #2 equals but doesn't exceed point #1.
Disclaimer - I am not a commodity trading advisor. The information on this site is for trading education only. There are no trading recommendations for any one individual made on this site and this information is paper trades for trading education. All trades are extemely risky and only risk capital should be used when trading.
U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.