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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski’s 1-2-3 Trend Change

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

In my book, Trading Classic Chart PatternsTrading Classic Chart Patterns book. (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 meaningful change 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 dramatically change 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 following for more information.

1-2-3 Trend Change For Downtrends

1-2-3 trend change method for downward trends

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, confirming a trend change.

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1-2-3 Trend Change Downtrend Example

An example of the 1-2-3 trend change method for downward trends

 

 

The chart on the right 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

1-2-3 trend change method for upward trends

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

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%, representing a trend change.

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1-2-3 Trend Change Uptrend Example

An example of the 1-2-3 trend change method for upward trends

 

 

The chart on the right shows an example of the trend change method applied to upward price trends. Point B is the highest high on the chart, point A is the lowest low. The trendline connecting the two does not cross prices until after the highest high, point B. 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 EditionGetting Started in Chart Patterns, Second Edition book.

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

 

 

The second book is Fundamental Analysis and Position TradingFundamental Analysis and Position Trading: Evolution of a Trader book.. 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

 

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Lead me not into temptation. I can find it myself.