1-2-3 Trend Change Method (2024)

In my book,Trading Classic Chart Patterns (pictured on the left) on pages 22 to 24 (down trendlines) and 42 to 45 (up trendlines), I discuss a technique for detecting trend changes which I call the 1-2-3 trend change method. I did not invent the method, rather, Victor Sperandeo did. His book, Trader Vic: Methods of a Wall Street Master (pictured on the right) discusses the technique.

Not only does his method provide a consistent way to draw trendlines, but it helps determine when the trend has made a meaningfulchange in direction. Discovering when the trend changes and taking advantage of it is what trading is all about.

Alas, the method is not without flaw. You can use it on any time frame, but how much information you display on a chart may determine which trendline to draw, and that can dramaticallychange the trading landscape. Nevertheless, in tests I found that the method helps detect a trend change, so it adds value. Read my Trading Classic Chart Patterns book and the followingfor more information.

• Downtrends
• Example
• Uptrends
• Example
• Book References
• See Also

1-2-3 Trend Change: For Downtrends

Select the timeframe for which you are interested in determining when a trend change has occurred or will occur. Draw a trendline from the highest high (Point C in the figure) to the lowest low (A) on the chart such that price does not cross the trendline until after the lowest low (point 1), then follow these steps.

Step 1: Find where price closes above the down-sloping trendline. This is shown in the chart as point 1 and a trendline pierce is the first indication of a trend change.

Step 2: Price tests a recent low. The recent low is at point A and the test is at point 2. Point 2 can be below point A but it must be clear that price is moving up, not continuing down.

Step 3: Price closes above a recent high. I show the high as point B and price completes the 1-2-3 trend change method when it rises above B at point 3. The high (point B) should be between points A and 2.

In a study I conducted of this method, 73% (74 of 101 samples) of the time price climbed at least 20% from the low (A), confirming a trend change.

1-2-3 Trend Change: Downtrend Example

The chart above shows an example of the trend change method applied to downward price trends. Point A is the highest high on the chart (on the left half, that is), point B is the lowest low. The trendline connecting the two does not cross prices until after point B. Point 1 is the trendline break. Point 2 is the retest and 3 is a close above the high between points 1 and 2. Point 3 is where price changes trend.

1-2-3 Trend Change: For Uptrends

The steps for upward price trends are similar to downward ones. Refer to the chart to the right.

Start by drawing a trendline from the lowest low (point C) to the highest high (A) on the chart such that price does not cross the trendline until after the highest high (point 1). Then follow these steps.

Step 1: Find where price closes below an up-sloping trendline. This appears in the chart as point 1 and a trendline pierce is the first indication of a trend change.

Step 2: Price tests a recent high. The recent high is at point A and the test is at point 2. Point 2 can be above point A by a little but it must be clear that price is moving down, not continuing up and making new highs.

Step 3: Price closes below a recent low. I show the low as point B and price completes the 1-2-3 trend change method when it closes below B at point 3. The low (B) should be between peaks A and 2.

In a study of 67 samples, I found that 29 or 43% showed declines of at least 20% below the high at A, representing a trend change.

1-2-3 Trend Change: Uptrend Example

The chart above shows an example of the trend change method applied to upward price trends. Point B is the highesthigh on the chart, point A is the lowest low. The trendline connecting the two does not cross prices until after the highest high, pointB. Point 1 is the trendline break. Point 2 is the retest, and 3 is a close below the lowest low between points 1 and 2. Point 3 is where price changes trend.

1-2-3 Trend Change: Book References

Two of my books discuss the 1-2-3 trend change method.

The first book is pictured on the left. It is Getting Started in Chart Patterns, Second Edition

You can find the information starting on page 28, "1-2-3 Trend Change Method."

The second book is Fundamental Analysis and Position Trading.It has coverage of "1-2-3 Trend Change for Downtrends" starting on page 168 and "1-2-3 Trend Change for Uptrends" beginning on page 170.

-- Thomas Bulkowski

See Also

• Slider tutorial: 1-2-3 trend change method
• Finding the bottom using the 1-2-3 trend change.
• Slider tutorial on up-sloping trendlines.
• Up-sloping trendlines play an important role in technical analysis. Find out why.
• If you thought up sloping trendlines were way cool, check out down-sloping ones, too.
• Drawing down-sloping trendlines
• Trendline mirrors. Use trendlines to predict price movements. Honest!
• Swing rule. A reliable way to predict price targets.

Lead me not into temptation. I can find it myself.