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1-2-3 Profits!

Through mass mailings, seminars, and other means during the last 10 or more years, Ken Roberts, as well as others copying his work, have attempted to market a get rich quick scheme that comes down to the basic Dow Theory popularized by Charles Dow back in the early 1900's. This method is not a revelation, or a miracle, or your method to riches, as the path is fraught with pitfalls.

However, the method does have merit and I use it all the time in my day trading and I have used it in position trading as well.

Eliminate the Pitfalls

The first requirement to eliminate many of the pitfalls. One must realize in the conception that all 1-2-3 formations are not alike! Yes, they will all count out 1,2,3 but few will make you any money.

The 1,2,3 must be located strategically, for the lack of a better term, in order to be useful.

Example 1-2-3 Formation

Let us use the example of a market turning from down to up in our graph found in 1-2-3 Chart Example [opens in separate window].

Line E-E and Line F-F show us the downtrend in force at that time. The longer these trendlines or the longer the trend has been in force the more important our 1-2-3 pattern becomes.

Trade Criteria

The criteria for a trade might be described as follows:

• A long and extended downtrend must have been in force!
  
  
• The initial wave from No.1 low to No. 2 high must exceed
  
  
• The most recent pivotal high in the downtrend! This is depicted in 1-2-3 Chart Example [opens in separate window] as Line C
  
  
• The high at No.2 should exceed the second pivotal high back form the low as depicted in our 1-2-3 Chart Example [opens in separate window] Line D
  
  
  • Note: Two line D's are shown and if either one is breached you have a good No. 2 to work with
    
    
• When the above conditions have occurred, we then retrace back down causing a No. 3 low to be made that preferably is higher than low No. 1
  
  
  • The more this No. 3 low is higher than No.1 low the farther the market will move normally above No.2 high when No. 2 high is exceeded!
    
    
• We become a buyer at 1-3 tics above the high of the second No.2 and in reality we have become buyers into the Wave 3 of an Elliott Wave 3 impulse wave upward.

The Selling side or shorting side of the 1-2-3 formation is exactly the same but opposite in structure. In futures trading we sell as easily as we buy as there is no uptick rule to deal with. All we need is another trader to take the opposite side of our trade. That is a scary thought as he thinks he is correct and you think you are correct in your respective analysis of the market you are trading!

From this discussion we can see that the 1-2-3 formation to the left side of our graph is a good 1-2-3 formation but our No.2 high was never exceeded so we must begin our count again.

Finally, at the apparent bottom of the market for this move, we get a tradeable 1-2-3 formation.

This is not to say all 1-2-3 formations are not tradeable unless they meet our criteria. It is to warn you that 1-2-3 formations are not the simple pattern to your personal fortune. They are of value when viewed in the proper context.

The next time you read something that says the author is going to make you rich for the discounted price of only $199, marked down for the next 10 days only from $295, the only one getting rich is the seller of the information.

At DaytradersBullettin.com and DaytradersMentor.com we will help you learn to trade successfully. If you examine our trading records, you will see we too have occasional problems in trading and those can involve the loss of money. The question is can we survive and get on with the business of recovering our losses and going on to new equity highs? That is the true test of a professional trader over time.