Bulkowski’s 1-2-3 Trend Change

The 1-2-3 trend change method is my term for a technique outlined by Victor Sperandeo in his book, Trader Vic: Methods of a Wall Street Master. The 3-step method helps determine when price has changed trend. For more information see pages 22 to 24 (down trendlines) and 42 to 45 (up trendlines) of the book Trading Classic Chart Patterns, and the following...

For Downtrends

Draw a trendline from the highest high (Point C in the above 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 a down-sloping trendline. This is shown in the above 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.

An Example

The above chart 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 the price changes trend.

For Uptrends

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 is shown in the above 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.

An Example

The chart to the left 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 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 the price changes trend.