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.
