The Jackson 5 used to sing that love was as easy as 1-2-3. While most people don´t think about investment advice in such terms, there is one investing strategy that is just that simple. The 1-2-3 System is a commonly recurring pattern that helps investors to find the start and end points of stock market trends. Once the 1-2-3 signal has appeared, an investor can move to enter his or her trade, knowing that a change in trend direction has occurred.

A Basic Explanation of the 1-2-3 System

The 1-2-3 System is a trading discipline triggered by each day’s high and low prices. The most simple explanation on how you could draw this signal on paper yourself is the following:

1. From the top-left corner draw a diagonal to the center of the page to locate the first point. Next from the first point, draw a diagonal line towards top-right corner, only end it halfway to the corner of the second point. From second point, draw a line that is parallel to the first line but much shorter; the end of this line is the third point.
2. Once you have drawn your basic pattern, draw a horizontal line from second point and once the same stock price has been achieved on the line rising from the third point, wait until it goes above that line and then buy. Using the same diagram and turning it upsidedown will give you the same pattern for a sell signal.
3. Finally, you can evaluate the severity of the move based on how many bars you can see between the signal points; the more dramatic of a move, the more lines that will occur. The 1-2-3 System works with any type of stock chart, whether you are using 5-minute tick charts, yearly charts, bar charts or candlestick charts.

Knowing When to Get In and Get Out

There is a trading strategy within the 1-2-3 System to help successful traders locate additional profits by staying in front of other investors. 1-2-3 formations will assist you to identify the three points on a given chart and draw your horizontal line from the second point to identify the buy or sell point leading away from the third point. The entry trick is to establish your entry point slightly before the trend reaches the pre-defined entry point; this puts you slightly ahead of other investors and you will be buying stock or selling short at a better price than the others.

Finding the correct exit point is probably where most fortunes are made and lost. Many investors spend a great deal of time and energy to determine when to enter a position but most do not have a stock trading system for determining when to get out. Once an “outlast the storm” mentality begins, the danger is exposing oneself to heavy losses. This is a key part of a money management strategy that should be part of the 1-2-3 System or any other; stay in long enough to earn your profits and get out soon enough to protect them.

Implement a Safety Net

A conservative approach investment protection is to set a trailing stop of 10% on any given position. This is easy to calculate and establishing a stop loss strategy eliminates any second guessing. By allowing a ten percent cushion, a trader both eliminates greed and fear from his or her exit decisions and leaves room for the market to make minor adjustments without exiting a position too early.

As Easy as 1-2-3

So you´re not a statistician or mathematical genius? No need to worry with the 1-2-3 System. The 1-2-3 System helps to identify entry and exit points in a clear, concise manner. This stock investing system gives investors an unemotional means of deciding the best times to buy and sell as well as providing simple trading rules for increasing profits and limiting losses. When teamed with a conservative portfolio management plan, the 1-2-3 System can help an investor to make a profit with a system that is as easy as 1-2-3.

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