To be able to understand our momentum 1-2-3 trading profitable strategy, you do not require any technical knowledge buy you required a simple chart of any time frame. In this trading system, we use the psychological concept of trader nothing else.

Which timeframe is suitable?

  • As this is our unique strategy works on all time frame one can use for intraday short term investment and best and long term.
  • The market is uptrend or downtrend, bullish or bearish not matter for us to execute this system.
  • To trade in profitably, you must know the market condition.
  • In any market there is one of below condition always apply, you just have to verify the current market condition and apply that system it is simple as its name momentum 1-2-3.

There is 4 type of condition in the market.

Source: Trading Fuel | Research Team
  • Market fall more than up – see condition A.
  • Market falls less than up – see condition B.
  • Market up more than down – see condition C.
  • Market up less than down – see condition D.

Now we take the first market condition: A

Source: Trading Fuel | Research Team
  • What you see in this condition – the first market going up and later on fall more than it gains.
  • By seeing this small chart what question comes to your mind – can you take a trading decision by this chart.
  • We know you answer no because by the above chart there is no sign of signal, no technical indicator there is only two lines one is up and second is on downward that’s is.
  • Now see the same chart just we changed the color of lines. In every market, there are 2 types of traders.
  • One who buys and pushes the market upward and the second who sells and pushes the market on the downside means to say bull and bear.
  • There is always a fight between bulls and bears, it is really interesting to see not in the market but in real life also who will win.

Market condition:

Condition-1: market fall and bear will win.

Condition-2: market up and the bull will win.

Trading decision:

Source: Trading Fuel | Research Team
  • As per the below chart, there are mentions where you have to buy and where you have to sell.
  • It is very important or we can say it is more important than buying or sell is when to enter and when to exit form trade.
  • When you buy or sell it is very important to get stop loss for that particular stock or commodity.
  • Make your stop loss above/below the neckline
  • In the previous chart blue line is called as neckline we can put our stop loss minor or below that line once break bull or bear that line.
  • This trading system will apply in all other market conditions A, B, C, and D in the same way.

Now we take market condition: B

Source: Trading Fuel | Research Team
  • What you see in this condition – the first market going up and later on fall but not more than it has gained.
  • In every market, there are 2 types of traders.
  • One who buys and pushes the market upward and the second who sells and pushes the market on the downside mean to say bull and bear.
  • There is always a fight between bulls and bears, it is interesting to see not in the market but in real life also who will win.

Note: Same Goes for Conditions C and D.

Top and bottom trading strategy:

Dow Theory:

Source: Trading Fuel | Research Team

In 1897, Dow invented the Dow Jones average, calculating it backward for many years.

Dow Theory was one of the initial mathematical theories which form the base of many indicators and trading strategies used in modern technical analysis.

When Charles derived the Dow Theory of the stock market, he saw that most stocks move in synchronization with the up and downtrend of the markets.

By calculation the averages of stocks and their prices, he found the correlation between the rise and fall of the stocks with the general market and derived the relation in a single value.

Dow Theory basic principles.

Source: Trading Fuel | Research Team

The basic principles of Dow Theory can be subcategorized as:

  • The averages discount everything
  • The market has three movements

The three movements are:

1.    In primary trend:

  • The upward price movement is known as a bull market or uptrend.
  • The downward price movement is known as a bear market or downtrend.

2.    The secondary reaction:

The primary trends do not move in one direction continuously. The primary trends are interrupted by reactions. We call these corrections in a bull market or uptrend and rallies in a bear market or downtrend.

3.     Daily fluctuations:

These tend to be quite random and are usually unimportant except to very short-term traders.

The six basic tenants of the Dow Theory are:

  1. The market discounts everything.
  2. The market has three stock trading trends (primary, secondary and minor).
  3. Trends have three phases (accumulation, mass participation, and distribution).
  4. The averages must confirm each other.
  5. Volume must confirm the trend.
  6. A trend in the stock is assumed to be intact until a valid signal is given by the price itself that it has reversed.

Top and bottom trading rules:

Rules for entering into a buying trade.

  • Share price must be in a downtrend.
  • Price forming lower low and lower high.
  • Entre after the previous lower high break.
  • Stop loss below the previous low.

Rules for entering into a short trade.

  • Share price must be in an uptrend.
  • Price forming higher high and higher low.
  • Entre after the previous higher low break.
  • Stop loss above the previous high.
  • Example of sell:
Source: Trading Fuel | Research Team
  • Example of buy:
Source: Trading Fuel | Research Team

Summary:

In this blog, we have discussed the four most basic and simple price formations, a, b, c, and d., and discussed in detail how to trade them in detail. These four formations are very easy to understand and trading them. We have also explained one trading strategy based on the basic tenant of Dow theory that is “top and bottom analysis”. Along with a trading strategy, one should not forget the importance of risk management and stop loss, as they are the core of any trading strategy.

Contain & Image ©️ Copyright By, Trading Fuel Research Lab

Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.