2B Rule 

A rule for identifying false breakouts, which occurs when the price makes a new high/low but then quickly reverses and breaks below/above the previous high/low, signaling a potential trend reversal. 

The 1-2-3 Rule is a simple yet effective trading method. If applied prudently, the chances of success will far outweigh those of failure. However, it has a drawback: by the time all three conditions are fully met, you will usually have missed out on a substantial portion of the price move. Therefore, we will discuss a rule here that can help you establish positions earlier. It is also my personal preferred method, which I call the 2B Rule. 

Note: Daily chart of corn futures prices in December 1990 — a market suitable for placing stop-loss orders. When the second condition is satisfied, it is an ideal time to enter a long position on corn. The market features high liquidity; the initial stop-loss can be set at the lowest point, and once the price breaks above the horizontal line overhead, the stop-loss can be moved up to that level. 

Whether the 2B Rule Holds True Often Determines Profit or Loss

In our earlier discussion of the second rule for trend changes, we mentioned a scenario: when testing a previous high (or low), the price may actually break above (or below) that level but fail to sustain the move. While this is merely a special form of testing, its occurrence usually signals an impending trend change. In other words, this phenomenon alone indicates a high probability of a trend shift; in terms of probability, it is far more significant than any of the three rules for trend changes. Given its unique importance, it can be regarded as a standalone rule in its own right.

The 2B Rule

In an uptrend, if the price makes a new high but fails to continue rising, and then subsequently breaks below the previous high, the trend is likely to reverse. The same logic applies to a downtrend. This rule is applicable to all three types of trends: short-term, intermediate-term, and long-term (see Figures 7-11, 7-12, and 7-13).

Note: December 1989 Soybean Meal Futures — A Short-Term 2B Setup

This daily chart of soybean meal futures depicts a short-term 2B signal. When the price made a new high and then subsequently broke below the previous high, day traders could have reaped substantial profits by entering short positions at that point.

In intraday short-term trends, after prices hit a new high (or new low), if the 2B Rule holds true, the reversal usually occurs within a single day or even sooner. In intermediate-term trends, once prices make a new high or low, the confirmation of the 2B Rule typically takes place within 3–5 days. At major (long-term) market turning points, following a new price high or low, the validation of the 2B Rule generally happens within 7–10 days.

In the stock market, after prices reach a new high, the trading volume in the subsequent movement is usually below the normal average; however, the confirmation of a reversal (i.e., when prices break below the previous high) is accompanied by a surge in heavy trading volume.

Note: December 1989 Cocoa Futures — An Intermediate-Term 2B Setup

This daily chart of cocoa futures illustrates an intermediate-term 2B signal. The prior intermediate-term high was marked as Point A; the price broke above it at Point B, only to fall back below the previous high at Point A three days later.

Note: Soybean Monthly Chart — Trading with Long-Term 2B Signals

This monthly chart of soybean futures depicts several long-term 2B signals. At Point B, when the price failed to break above the high at Point A decisively, the 2B signal indicated an excellent opportunity to enter a short position. At Point 2, when the price failed to break below the low at Point 1 decisively, the 2B signal signaled an ideal opportunity to enter a long position. At Point 4, long-term investors who traded based on the 2B Rule would have been stopped out with a modest loss. Nevertheless, you should have re-established a long position later; given the subsequent price movement, the amount of the prior loss was negligible.

When trading based on the 2B Rule, you must act decisively and admit your mistakes immediately if the market moves against you. For example, in an intraday trading scenario, if you go short in accordance with the 2B Rule, you must close out your position instantly once the price rebounds and breaks above the new high again.

If the price still fails to break above the high decisively, you may short the market again—but you must cap your losses and be ready to exit the trade with a small loss. As long as you can cut your losses quickly, you will be able to "live to trade another day". For intraday trading, the success rate of the 2B Rule is only around 50%. By limiting losses when wrong and letting profitable positions run when right, you can reap substantial profits. For intermediate-term and long-term trading, however, the 2B Rule boasts a much higher success rate.

Note: Dow Jones Industrial Average and Dow Jones Transportation Average — The Industrial Average Forms an Intermediate-Term 2B SignalThe non-confirmation of the new high by the Transportation Average further increased the odds of a successful short sale.

A classic intermediate-term 2B signal emerged in the Dow Jones Industrial Average (DJIA) on October 13, 1989 (see Figure 7-14). On October 9, the Industrial Average hit a new high of 2,791.40 on light trading volume, but this new high was not confirmed by the Transportation Average—a clear intermediate-term bearish sign. In the subsequent days,

The Rationale Behind Stop Hunting and the 2B Pattern

Aware of the locations of stop-loss orders, floor traders and proprietary traders, acting out of self-interest, seek to push prices slightly below support levels or slightly above resistance levels to trigger those stop-loss orders. This practice is known as taking out the stops. Once the stop-loss orders are triggered, the market readjusts accordingly. This is the primary reason why most 2B patterns occur, and such activity can be observed across all types of markets. Stop hunting happens most frequently on an intraday basis, but it also applies to intermediate-term and long-term trends.

When discussing the 2B pattern and its underlying causes, we assume that no major market-moving news has emerged, nor have there been any material changes in the fundamentals of individual securities. Trading solely based on the 2B Rule without integrating specialized market knowledge can entail considerable risks, especially in commodity markets, which are highly sensitive to news-driven volatility. Nevertheless, when combined with comprehensive market expertise, this rule can generate substantial profits for speculators.

I checked the 2B indicators published on the TradingView Community, and there are currently two relatively popular ones: 2B Detector Beta and 2B Reversal Pattern (Expo).

2B Reversal Pattern (Expo)
This indicator works in a simple, four-step cycle to spot potential trend reversals:

1. It first identifies key high/low price levels (called pivot points) in the chart.

2. It watches for moments when the price breaks through these levels but fails to keep moving in that direction (these are fake breakouts).

3. It then checks if the price quickly bounces back across the breakout level within a set time window.

4. It filters out any signals that don’t meet the time window rules to avoid false alarms.

In short, the indicator catches the pattern where the price "breaks and bounces back" from key levels, which suggests the original trend is losing steam and a reversal may be coming. This helps traders make more informed decisions.

2B Detector Beta is a great indicator.
From my experience, there is no need for excessive parameter optimization. The 20-period EMA works quite reliably as a filter, and the volume filter is not overly restrictive either. The rule of using two candlesticks on each side to confirm fractals also strikes a moderate balance in terms of signal strength.
For a detailed analysis, please refer to the article "A Detailed Analysis of 2B Detector Beta".

Through empirical research, Mandelbrot found that the α value of the price distribution of financial assets is approximately 1.7, which is far lower than 2. This directly proves the fat-tailed nature of price fluctuations. When α < 2, the distribution exhibits a "fat tail" characteristic — meaning extreme events have a higher probability of occurrence.

The fat-tailed nature of price fluctuations indicates that when a trend reverses, the magnitude of price increases or decreases may far exceed expectations, and such risks cannot be predicted using the traditional method of "mean ± standard deviation".

The difficulty in identifying reversal signals does not lie in the signals themselves, but in the fact that after a signal appears, prices may move in an extreme manner. Therefore, it is imperative to control such unpredictable extreme risks through stop-loss strategies.

For intraday trading, these two indicators do not perform well due to the noise nature of the 5-minute timeframe far exceeding the indicators' filtering capabilities. The 2B detector will deliver better results because it incorporates volume and moving average filters.

Most participants in the 5-minute timeframe are short-term speculators and high-frequency algorithms, making price fluctuations more prone to artificial manipulation (such as bull/bear traps). Many breakouts are deliberately engineered "traps" by capital flows rather than genuine trend reversal signals. During the opening and closing sessions, or when major economic data is released, the trading volume and volatility of 5-minute candlesticks surge abruptly. This causes severe distortion in pivot point identification, leading the indicators to easily trigger false signals amid such extreme volatility.

I will develop a 2B indicator later. 

The main issue is that the two popular indicators mentioned above over-simplify market structure and trend analysis. The 123 Rule and the 2B Rule are still based on traditional theories such as trend lines and wave principles, and it is insufficient to merely rely on simple swing highs and swing lows for analysis.