1-2-3 Rule 

A rule for identifying trend reversals, consisting of three steps:

1. The existing trend is broken.

2. A retracement move fails to make a new high/low.

3. The price breaks through the critical level formed by the retracement.

How to Determine a Trend—Drawing Trend Lines

An uptrend line is drawn as follows: within the period under consideration, start from the lowest trough, draw a straight line upward to the right, and connect it to a trough that occurs before the highest peak, ensuring the line does not cross any price levels between these two troughs (see Figures 7-1 and 7-2). Extend this line past the highest peak. Once the trend line moves beyond the highest peak in the period under consideration, it may cross certain price levels. In fact, this is a sign of a potential trend change, a topic we will explore in later discussions. 

A downtrend line is drawn as follows: within the period under consideration, start from the highest peak, draw a straight line downward to the right, and connect it to a peak that occurs before the lowest trough, ensuring the line does not cross any price levels between these two peaks. Extend this line past the lowest trough. 

This method, despite its simplicity, is remarkably precise and consistent. If you perform a linear regression analysis using data from the same period, the slope of the best-fit line will be quite close to that of the trend line. Unlike other approaches, this method prevents you from drawing trend lines based on personal subjective judgments—avoiding the imposition of personal biases onto the trend lines. It also provides a graphical benchmark for identifying trend changes when they occur. 

For the drawing of trend lines, I have developed both EasyLanguage and Pine Script indicators. The name is "Professional Trend Line 123".   It is a private invite only indicator in TradingView. If you need this indicator, contact me. 

The chart below is a 5-minute chart of E-mini S&P 500 futures. Trend line indicators perform better on larger timeframes.

How to Identify Trend Changes: The Simple 1-2-3 Rule

Trend line breakout: Price crosses the drawn trend line.

An uptrend fails to make a new high, or a downtrend fails to make a new low.

In a downtrend, price moves upward to cross the previous short-term rally high; or in an uptrend, price moves downward to cross the previous short-term pullback low.

How to Confirm Trend Changes: The 1-2-3 Rule & Practical Guidelines

If all three of the aforementioned conditions occur simultaneously, it is equivalent to a trend change confirmation under Dow Theory. If only the first two conditions materialize, they indicate a potential trend change. The occurrence of two out of the three conditions increases the probability of a trend shift, while the convergence of all three confirms a definitive trend change.

To observe trend changes on price charts, the aforementioned principles must be translated into graphical terms as follows:

1. Draw the trend line.

2. In a downtrend, draw a horizontal line through the current lowest low and another horizontal line through the high of the previous short-term rally.

3. In an uptrend, draw a horizontal line through the current highest high and another horizontal line through the low of the previous short-term pullback.

For uptrends specifically:

• Mark ① at the point where price crosses the trend line.

• Mark ② if price approaches, touches, or slightly penetrates the horizontal line corresponding to the current high but fails to break through it.

• Mark ③ if price breaks downward through the horizontal line corresponding to the low of the previous pullback.

If two of these three marks appear, the trend is likely to change. If all three marks materialize, the trend has already changed and will most likely continue in the new direction.

With a little practice, you will be able to visually identify trend change criteria and apply the 1-2-3 Rule intuitively: ① Break the trend line; ② Test the previous high or low; ③ Break below the low of the previous pullback (in an uptrend) or break above the high of the previous rally (in a downtrend). The appearance of 1-2-3 signals a confirmed trend change!

Of course, trading based on these guidelines does not guarantee 100% success—no method is infallible. Sudden reversals are particularly common in illiquid markets, securities highly sensitive to news, or highly speculative assets.

The best way to avoid significant losses (or "getting slapped") is to follow these rules:

1. Only trade in highly liquid markets with a historical track record of few sudden, sharp reversals.

2. Whenever possible, avoid markets that are extremely sensitive to news or react drastically to government monetary and fiscal policies.

3. Establish a trading position only if you can set your exit point at a previous support or resistance level.

I have now completed the development of the Trend Line 123 indicator.