I have noticed that many people often feel confused in the process of learning trading, as there are just too many trading methods available on the market. It's hard to know which method can effectively improve one's trading skills and what to learn.

In the early stages, I also studied hundreds of methods, and in the end, only two or three of them were distilled and applied to my own trading system.

In fact, there are some trading rules in technical analysis that have been verified many times. These rules can help us find trading opportunities with higher accuracy and more ideal risk-reward ratios.

Today, based on my past trading experience, I have organized six very practical trading rules for actual combat, including those I am currently using, some to improve the success rate of entry, and some to improve the success rate and profitability of breakouts. I believe they will provide substantial help to everyone.

1. The 123 Rule

The 123 Rule is particularly frequently used in technical analysis, and my own trading system also includes this rule.

This rule is an extension and application of Dow Theory, most commonly used to confirm trend reversals and as a signal for opening positions. It can be easily applied after simple quantification. Even mastering the 123 Rule proficiently can form a complete trading system.

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So this rule is very fundamental and also very practical and effective, worth learning. Next, I will talk about the pattern and application of this rule to facilitate your understanding and application.

Pattern of the 123 Rule:

This pattern is somewhat similar to the letter "N" in the English alphabet. For example, after a market trend has been falling continuously, it encounters resistance and forms a retracement, which is the "1"; after the retracement ends, the market falls again without breaking the low point of the previous "1", which is the "2"; after "2" is completed, the market starts to rise again, breaking through the high point of "1", and this is the "3".The entire pattern resembles a lowercase "N" shape with a lower right side. Let me explain it with a picture.

The market fell continuously from the high point of 1.09600 to 1.08500, and after the significant drop stabilized, it began to reverse and move upward. First, it broke through the black downward trend line in the chart (the first upward blue arrow, this is 1), and then it retraced at the position of 1.09200 (the second downward blue arrow, this is 2), without breaking the previous low. The market then broke through the high point of 1 again at 1.09200 (the third upward blue arrow, this is 3), and the entire blue arrow formed an "N" shape.

Application of the 123 rule:

A: Confirm the trend reversal.

According to Dow Theory's definition of trends, an uptrend is characterized by the market moving upward, retracing without breaking the previous low, and then continuing to break the previous high. A downtrend is characterized by the market moving downward, retracing without breaking the previous high, and then continuing to break the previous low.

The market trend continues in a structure of rises and falls, or falls and rises, in an "N" shape pattern.

So, at the end of this uptrend, a downward 123 structure emerged, which can be understood as a bullish trend reversal. At the end of a downtrend, an upward 123 structure emerged, which can be understood as a bearish trend reversal.

The chart shows the EUR/USD candlestick chart, with both the left and right sides being 15-minute candlestick charts. The left side is a schematic diagram of the top 123 pattern reversal. After a significant rise, the market retraced, ended the retracement, made a second upward push without breaking the previous high, and then broke through the previous low, confirming the trend reversal.

The right side is a schematic diagram of the bottom 123 pattern reversal. After a significant drop, the market retraced upward, ended the retracement, made a second downward push without breaking the previous low, and then reversed upward and broke through, with the previous high confirming the trend reversal.B: Used as an entry signal.

The 123 rule pattern serves to confirm trend reversals, and the point of confirmation is when the breakage point is higher or lower than point 1 by 3, thus the breakage point can be used as an entry signal for trading the break. In practical applications, this method can also be used to enter trades in a larger time frame while focusing on a smaller one.

The chart shows the EUR/USD currency pair with candlestick charts, with the left side being the 4-hour level and the right side being the 15-minute level.

The left side of the chart shows the market testing the previous high resistance near 1.10100, indicating a potential for reversal. At this point, switch to the 15-minute chart level, and when a downward 123 pattern appears on the right side at the 15-minute level, open a short position with a stop loss set at the previous high point, after which the market drops significantly.

Precautions for using the 123 rule:

(1) Applicable to different time frames.

Dow Theory's definition of trends is applicable to different time periods, so the 123 rule can also be applied to different candlestick chart periods, such as daily, hourly, and minute charts.

(2) Many top and bottom reversal patterns conform to the 123 pattern standards.

In many top and bottom reversal patterns, the 123 rule pattern is part of the reversal pattern, such as the right shoulder of double tops and double bottoms or the head and shoulders top and bottom patterns, which typically have a 123 pattern structure.

Additionally, in the 15-minute candlestick chart shown in our image above, the 123 entry pattern is also a double top structure.(3) In actual combat, there are even more aggressive ways to use it.

For example, after 1 comes out, try to enter at the low point of the 2 retracement to do the reversal of 3, which can be done at the starting point of the 2 wave, with a small stop loss and a good profit and loss ratio, and at the same time, you can add positions when 3 breaks through.

2. The 2B Rule

The 2B rule is a variation of the 123 rule, and this pattern can also be used as a signal for trend reversal and entry, and this pattern is also a very successful one in actual combat, with a very ideal profit and loss ratio. Why is that? Let me explain the definition of this rule, and everyone will understand.

The pattern of the 2B rule:

The English name of the 2B rule is Twice Breakout, which means two breakthroughs, as the name suggests, there are two breakthroughs in this pattern.

Taking the bull market as an example, after the price has experienced a significant rise, a new high point A is created at a high position, and then the market retreats, forming a low point B, and then the market quickly rises again, creating a new high point C, but the market cannot continue to be bullish, but turns bearish again in a short time, and breaks through the previous high A, when breaking through the previous high A, the second breakthrough is formed, which is the breakthrough point of the 2B pattern.

The bearish pattern is the mirror image of the bullish pattern, which will not be discussed here, I will explain the bearish reversal of the 2B rule with pictures.

After the market has experienced a continuous significant decline, a new low A is formed at a low position, and then the market retraces from A, creating a high point B, the market breaks down again from B, forming a new low C, but it cannot continue to be bearish, and quickly reverses, when the bull market breaks through the price of A, the breakthrough of the 2B pattern is formed.The essence of this pattern is a fake breakout structure that occurs after a significant decline, where the market breaks down to induce a short squeeze at a low level and then quickly reverses.

(1) After a substantial decline, the market maker quickly induces a short squeeze, and the probability of a reversal is high after a fake breakout and liquidation.

(2) The 2B breakdown point is the first resistance level after the short squeeze reversal, which is the best entry point next to the reversal point. The stop-loss space is small, and after the market reverses, the risk-reward ratio is very high. Therefore, the 2B pattern has a high success rate and a favorable risk-reward ratio.

Application of the 2B rule:

After the market tests an important support or resistance level, use the breakdown point of the 2B rule to enter the market, set a stop loss, and then conduct trend-following trading.

The chart shows a 4-hour candlestick chart of the Euro to US Dollar exchange rate.

The market fell from 1.10100 and tested the horizontal support at 1.07500, then stabilized and rebounded upward. It quickly made a new low afterward and then recovered to form the 2B pattern. Entering the market at the 2B breakdown point, the entry price was 1.07500, with the stop loss set at the previous low of 1.07200, which was only 300 pips. Subsequently, the market rose significantly by 2600 pips, resulting in an ideal risk-reward ratio.

Precautions for using the 2B rule:

(1) The 2B rule should be used only after a continuous major bullish or bearish trend, when there is an expectation of a reversal in the market.

(2) During the process from point B to point C's breakdown, the presence of a large bullish or bearish candlestick with a rapid market movement can enhance the effectiveness of inducing a short squeeze or a long squeeze, increasing the probability of a reversal.(3) The application of the 2B rule in conjunction with important support and resistance levels can yield more satisfactory results.

3. The Double Rule

The Double Rule is a law of market movement, indicating that after a breakout, the space the market travels is at least double the size of the previous consolidation pattern, or the price range of the market's double space acts as a support or resistance.

For instance, patterns such as rectangle consolidation, double bottoms and tops, and head and shoulders top and bottom patterns all possess this characteristic.

The chart shows a 15-minute candlestick chart of spot gold. The market is consolidating at the top, forming a head and shoulders top pattern.

After the consolidation pattern breaks, one can enter a short position, with an entry price of 2019, and a stop-loss price at 2039, with a stop-loss space of 20 USD. After the breakout, the market begins to decline, and when the decline reaches about 40 USD, the market starts to stabilize and oscillate.

In practice, one might consider setting the profit-taking target near this level, or after the market reaches it, moving the stop loss to protect the position, or partially closing the position to lock in profits.

Precautions for using the Double Rule:

(1) The market space of the Double Rule is the most basic profit space after the breakout and can be used as a more conservative profit target. However, in fast-moving markets or major trend markets, the space may exceed double.

(2) The double space rule, using the high and low points of the consolidation range for stop-loss, can at least achieve a 2:1 profit-to-loss ratio. If a secondary high or low point stop-loss is used in practice, or if a smaller scale entry stop-loss is applied, the stop-loss space is smaller, and when the market reaches the double space, the profit-to-loss ratio is already very favorable.For instance, in the case of the 15-minute breakout point shown in the image above, if the stop loss is set at the inflection point of a 5-minute breakout, the stop loss can be halved to a $10 stop loss. When the market moves twice the amount, the risk-reward ratio can be achieved at 4:1, which is already quite ideal.

4. The Two-Thirds Rule

The Two-Thirds Rule is a temporal principle. When the market reaches the two-thirds point of the time cycle, the probability of a breakout is higher, or the success rate of a breakout is greater when the market is at the two-thirds position of the time cycle. This rule is primarily used in triangular consolidation patterns. At the two-thirds point in the time of the triangle's cycle, the likelihood of a breakout is higher, and after the market breaks out at the two-thirds position, the probability of a genuine breakout is higher.

The chart shows a 1-hour candlestick chart of gold. Recently, after gold reached a historical high of 2144, the market quickly fell back, forming a triangular consolidation pattern. From the start to the end of the triangle's establishment, there were a total of 134 candlesticks (the interval marked by the red rectangle in the chart). The market broke out at the 90th candlestick (the interval marked by the blue rectangle in the chart), approximately at the two-thirds position, and then the market continued to decline.

According to the Two-Thirds Rule, when trading triangular consolidation patterns, one can focus on the two-thirds time node and trade the breakout patterns at the two-thirds position to increase the success rate of trading.

5. The Sensitivity and Effectiveness Rule of Indicator Parameters

In trading, many traders are concerned about the parameters of indicators because it often happens that a parameter works very well for profit in one phase, but after some time, it starts to result in losses, which is very confusing. How should one choose the parameters of indicators?

The confusion arises from not understanding the sensitivity and effectiveness rule of indicator parameters. The rule of indicator sensitivity and effectiveness states: Small parameter values result in high sensitivity but low effectiveness, while large parameter values result in low sensitivity but high effectiveness.Taking the moving average as an example, a moving average with a small parameter, such as a 10-day moving average, changes quickly and can very sensitively follow the trend, timely issuing signals for market changes, allowing for earlier entry, but it also generates more false signals.

On the other hand, a moving average with a larger parameter, such as a 30-day moving average, changes more slowly, issues change signals later, and allows for later entry, resulting in fewer false signals.

In the chart, which is a 15-minute candlestick chart of spot gold, there are two moving averages, the red one is the 30-day moving average, and the black one is the 10-day moving average.

It can be observed in the chart that the 10-day moving average is very sensitive. During the downtrend, there are multiple instances where the candlestick crosses the moving average, signaling a reversal, which is not conducive to holding positions. The 30-day moving average, however, continues to follow the bearish trend without signaling a reversal, and in this trend, the stability of the 30-day moving average is better.

But when the market reaches the bottom and is about to reverse, the 10-day moving average can issue an exit signal earlier, while the 30-day moving average is later, and the sensitivity of the 10-day moving average shows its advantage.

Other indicators, such as Bollinger Bands, MACD, etc., also have these characteristics with different parameter sizes.

There is no indicator parameter that performs well in all market conditions. Choosing a parameter means accepting its imperfections. While benefiting from the profits it brings, one must also accept the potential losses it may generate when it does not align with the market trend.

When selecting indicator parameters, one should only consider which one is more suitable for oneself. A person with a quick temper who demands high trading frequency should choose a small parameter; if one wants to hold positions for a longer period, then a large parameter should be chosen.

Understanding the law of sensitivity and effectiveness of indicator parameters, it is enough to choose a balance point between sensitivity and effectiveness that meets one's psychological expectations.

6. The Law of Equivalence of Time and SpaceA saying goes in trading, "Time for space."

There is a common universal law in trends: the longer the consolidation pattern lasts, the higher the probability of success after a breakout, and the greater the space it runs after the breakout. This is the law of time-space equivalence, also known as the popular saying "The longer the horizontal, the deeper the vertical."

The chart shows a 1-hour gold candlestick chart. After a continuous rise, a rectangular consolidation structure was formed, which lasted for three trading days, and the range of consolidation was compressed very small.

After a long consolidation, the price broke out and rose sharply. Gold also took advantage of this consolidation pattern to set a historical high.

Notes:

(1) Long-term consolidation patterns formed near key positions should be closely watched. These often accumulate strong forces, and once the trend breaks out, it is a high success rate and high profit rate trading opportunity.

(2) Patterns with long consolidation time cycles and small compressed spaces, like the example above, are also high-quality trading opportunities.

The above content is a very basic rule in technical analysis, but it is also a very important rule. Understanding and utilizing these rules will make our trading more accurate and have a higher success rate.