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Trading 1-2-3 Tops
by Mike Reed
The "1-2-3 Top" that you will read about below is one of the many trade set ups that I personally developed and use in my own trading at tradestalker.com. It can be used as a day trading tool or for longer term horizons.
Watch video of How To Trade 1-2-3 Top
The 1-2-3 Top is a powerful setup in which the second move towards the top falls short of a double top. The 1-2-3 Top is very close to the same pattern as the "second chance entry." However, it differs from the second chance entry by being the actual top or bottom of the day (to that point in the trading day, of course).
For labeling a 1-2-3 top, the #1 point is the new high for the day. The #2 point is the first pullback low from that new high for the day. The #3 point is the bounce back high off of point #2, which is a lower high than at the #1 point. The 3 "points" on the chart will be clearer after you see the video.
This is a pattern that sets up reversals, so we are looking for a clue that the reversal will begin from that #3 point.
When the top at #1 comes at (or near) fixed resistance zone listed in my nightly update, it strengthens the odds of the setup. Since the resistance was rejected once already, and caused a pullback, a bounce to that area is one reason for entry, using an initial hard stop just above the high for the day.
If the #3 point is NOT at fixed resistance area, but there is a bounce back to just under the high of the day without a Tick extreme (+1000 or higher), wait until the price curls over from the #3 position, or falls fast and pulls back a little. That is entering after some "proof" that there is a potential intra-day top in place.
A third way to enter is to use a "trigger" which also gives some proof of a turn. The "official trigger" that an intra- day top should be in place is a break of the #2 point. However, waiting for that doesn't always give a good entry.
To fine-tune the "trigger" entry, I use a break below the low of the point #3 high bar. This can be done on the 5 minute chart, however for this setup I will use the bars on a 2 minute chart for the "trigger" entry.
When you enter on a curl top from point #3, or use a "trigger" or use a pullback toward the second top, your "risk" (the money at risk, not the odds on the trade) isn't as good as an anticipation entry. An anticipation entry would get you short very near the top at point 3, while the other entry techniques would have you short at a lower price. Your initial hard stop is further from your entry, risking more money on the setup.
On the other hand, the following all make the trade a higher-probability entry than the anticipation entry:
A) entries on a "down curl from 3"
B) a pullback toward #3 or
C) using a "trigger" on the 2 minute chart.
If you take the curl entry (after point 3) and the market just sits there, get out immediately and take another look.
Don't sit and hope, no matter how good you feel about the setup. This will give you a fresh look without your capital being on the line.
Time in the market equals risk exposure. Staying out of the market when conditions aren't favorable is an important way to reduce the overall risk in day trading (or just trading, in general). If a setup pattern re-establishes itself, then a second entry can be taken.
Here is a 1-2-3 Top that I captured live on audio/visual.
I'm "walking" you through this set up as it develops:
(please give it a couple of seconds to start playing)