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OK, so we talked a little bit about how do I define that false breakup may or may not be occurring.
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So was there some strategies we can use to help us become better traders along that as well when we
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think of false breakup might be occurring?
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So that's what this lesson is about, is your strategic approach to these types of things, these false
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trend line breaks are potentially false trimline breaks and once again, hard fast rule.
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Once the trend line is broken, no matter how it's broken, you know, the trend is over.
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That is the hard, fast rule.
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Again, you're well, you're following that rule takes emotion, hope out of it, takes a lot of extra
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analysis out of it.
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So nothing wrong with that.
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As far as once that trend line is broken, the trend is over.
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However, false brakes do happen, frequently happen.
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So there might be ways that we can use a strategic approach to really kind of deal with them and help
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us be better traders.
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And we're going to talk about how we can use support and resistance lines in terms of our strategy,
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but also how to apply filters around this, too, in this lesson.
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So let's let's get to that how we be able to deal with these potential false breakouts in terms of strategy.
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So here's an old friend here.
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Let's say we saw this this happening, right?
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We saw this image here on the left there.
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As far as you've got this nice uptrend that you bought into this nice uptrend.
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And before you see the definite turnaround there, but let's say you're seeing this uptrend and you
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first see the support line is broken and you're thinking, you know what, the support line's broken,
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but maybe that's just temporary.
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Profit-taking you can see we had this nice long trend before that.
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And we bought in on the in this example, on the third touch.
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But let's say if you bottom sooner even and you'd have a nice long trend that you've been make a nice
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profit and maybe there's just some temporary profit taking.
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Maybe it's just going to go down or sideways a little bit and then resume that trend.
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So if the closes below the trend line, you're thinking, well, maybe it might be OK to hang in there
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a little bit, just hang in there a little bit more.
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So if you were to use this as a strategy around that, well, you could do is adjust your stop loss
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order to kind of lock in profits.
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Right.
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We saw when we bought you.
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Can you put a look at the lesson around stop loss orders and how to use these orders?
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But basically, you're going to set a stop loss at a certain point in this case would be moving above
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what you bought it at.
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So if it if you're wrong and it's not a false breakout and it keeps going down, you'll be able to automatically
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sell because of the order you placed in lock and lock in some profits there.
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The other thing you can do, like in this example, is adjust the total amount of the money committed
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to the trade.
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Right.
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So let's say we bought in here at a certain amount and we could say, OK, we're seeing some bearish
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signs, we're seeing support line breaks instead of selling everything.
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Maybe we do as we sell some, but not all of it to reduce the risk and lock in some profit.
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And then we can sell all of it later on if we get a more definite sell signal as it starts to make that
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turn.
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So the idea is I've made a profit, I'm going to lock in some of those profits.
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I think I might have a false breakout, maybe some temporary profit taking.
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I'm going to hang in there a little bit, but with a smaller position, a smaller amount committed because
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I've already taken some of it out.
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And if it looks like it, go south and it's really just it is a definite breakage and it's keeps going
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down in this example.
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It does.
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Well, then I'll I'll sell at that.
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I'll sell and still make a profit, but I'll sell, I'll get out of it completely at that point and
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then I'll sell it all later on and say that more definite sell signal.
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So you see in this example here where we have buy and then you can see where cross that line.
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Maybe you're saying I might sell here, but I might not really hang in there.
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And then it starts to see where we're definitely having a closed all the way below the brake line.
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Now we're really selling at that point.
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And maybe we already took out some profits of sell maybe.
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And then we took the rest out of the cell.
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Definitely.
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But if I turn and go in the other direction, then we still have some money in that we could keep writing
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that trend.
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And again, with all this, you don't have to be perfect, right?
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You want to start using strategies to help.
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You'll lock in profits and things so you don't have to be perfect on all this.
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You just have to be, you know, kind of smart about it.
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Another way of things could happen is let's say a resistant line breaks, right?
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So the buyers or the bulls have broken through there.
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We're on a deep downward trend and has been broken through.
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The trend is well established.
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You can see the downtrend here on this image has established.
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You could have you know, you could see that on the second touch of the third touch.
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That is definitely a downturn established with the fourth touch.
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You could say, well, it's still part of a downtrend.
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And the question is, will it become a new uptrend once it's broken through?
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Right.
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We're looking at is this a false signal?
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It's already broken through.
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This whole idea is it's broken through.
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So the strategy around this and a resistance line break, you know, it's been in a downtrend.
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It's broken through.
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Will this become a new uptrend?
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So the strategy wait for the second or third touch to buy into the new uptrend.
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That's our orange line there.
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You could see we got a second touch there, especially since we're coming out of a real steep downtrend
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in this particular example.
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This might be a case where it might be safer to wait for a third confirming real establishing a third
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touch, just to be sure, just because it just.
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Out of a big downtrend in this example, if, for example, and that's the orange line there, other
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thing to do is called selling short and basically you're buying the price will continue to go down at
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number two or number three toucher of the resistance line, sir, back in the blue numbers there.
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And you're you're seeing you could be selling short at those periods and then you close your short position
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once it breaks through in that a resistance line breakout you.
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So you're booking your profits at that point.
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So you're you're kind of betting this in terms of that way or investing it that way when we get the
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order taking about how to sell short and how to cover your shorts, you know, though, we'll get into
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that how it works.
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But the idea is you think it's going to go down.
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You're investing in a way that you're betting on it to go down.
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It does go down.
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And then once it breaks that line, you're getting out.
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So, again, you don't have to be perfect with any of this.
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And really, for most people who aren't selling short, they're really doing that first strategy of
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like I see us breaking through, I'm waiting for the second or third touch to buy a new truck turn.
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And if that doesn't form, then I'm still staying out.
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I'm still staying on the sidelines.
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That's what I'm watching for.
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New trends or new indicators do confirmations to come along with a resistance line break.
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There's also some interesting rules out there or different ways you can approach it to beyond this.
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That's the core part.
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One interesting one is the one, two, three rule as created by trader Vic, now famous trader, trader
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Vic author as well.
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And in the whole part of this and all of this is the goal is to manage the big challenge or at least
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temporary pullbacks in this case of an established uptrend.
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So the one, two, three one rule is regarded related to definite established uptrends and trying to
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sell out of a temporary pullback.
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You want to try to run that.
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You want to keep running with that trend helps you to not get out too early.
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So if you were bought early in the trend, you had this nice run up, then it pulls back.
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It's the idea of the one, two, three rules that you're not selling till the pullback you have across
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a trend line that's selling during the pullback.
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You're trying to work through this temporary challenge as far as a pull, a temporary pullback so you
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can keep your money on and let that profit keep running.
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So how's one, two or three rule?
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Look, let's let's take a look at that.
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So let's walk through this in steps.
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So first off, let's say on this particular one here, you can see we have a nice uptrend.
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We bought on the second touch on this example, could have been on the third touch, but we bought in
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there.
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And you can see we have a nice price run up, nice profit up there.
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And then we see across the trend line, that's our sell signal.
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And so that's the first time we tell us, oh, we got to sell it.
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Susan breaks that line we're selling.
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Or if you want to wait till fully it's a full close across, you could sell them to.
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So but you're looking at this line.
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You're saying, I don't know if I really want to sell.
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And there might be some really good logistical reasons behind this are tactical reasons, not hoping
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and praying, but really some things that happen.
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If you look right before that sell, you know, going back from the sell thing, you see there's a a
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gap up, right?
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There's a big there's a jump between the two two white candlesticks where there's where the prices don't
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overlap or the price range doesn't overlap.
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A gap is always a good, you know, bullish sign.
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Right.
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It doesn't mean it's literally going to happen that way.
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They'll keep going up, but it definitely is a good sign that something good is happening.
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So you had a gap up.
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And then also you see there we have all these higher highs and we have these high closes all row, you
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know, seven of them since you brought one, two, three, four, five, six, seven, since you bought
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it, kept going up seven straight times.
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So that's good, too.
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But then now there's this temporary pullback or maybe it's a temporary pullback.
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You don't know.
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But you reach that peak and then you start seeing that the prices now start going red and the cattle
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go red is starting to go down and it crosses that trend line.
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So with that good stuff, all those high close to zero and the gap up, do I do I really sell because
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across that trend line or people just taking some profits and they're just doing that, what how do
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I apply my one, two, three rule to this is the idea.
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So there's how you do it.
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So let's put on some lines on this.
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And this is how the one, two, three wheel works.
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So first thing you do is in order for the one, two, three rule to be activated, you have to have
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the support line broken.
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Right.
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That's the whole idea.
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You're trying to see if this is a false signal.
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So first step, it's got to be broken.
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Right.
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And you can sell right there.
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You know, it's always the established rule.
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You can just sell there.
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But if you want to try one, two, three to see if it's more of a false type of false type of breakage,
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then the second step you would do after the sparling's broken is you're watching for it to test of higher
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highs.
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You might go down a little bit more, might go sideways, but you're then you're looking for a turnaround
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and for it to go back up and test the higher highs.
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That's that.
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Number two, they're drawn a line.
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Whatever was the highest point of that trend before it was broken.
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That's where I'm going to draw my line for my number two of the one, two, three rule.
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And you can see it was actually a red candlestick.
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It was a down day.
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But the the bulls, the buyers tried to push that price higher.
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They tried to keep going with that uptrend, tried to turn that into an update.
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But the.
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The bears, the sellers won out on that day and then pushed it down and then kept pushing it down past
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the trend line, but that's where we look at that highest high end number two.
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And then number three is where you look at where the previous significant low was.
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And this could have been higher up in the trend line, but not in this example.
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The previous significant low that approach the the trend line is where you draw a line straight across
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that year, number three.
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And once that's broken, then you have real definite confirmation that this is not just a not just a
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temporary thing.
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It's a definite thing as far as a turnaround.
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So if we look at the one, two, three in this in this example, you can see, of course, the support
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line was broken and the highs they had lost, they had a little pullback, had a little turnaround,
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but it never really tested that higher.
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Hi.
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See how the highest point after the support line, after the trend line never got up to number two,
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never broke through.
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No.
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Two is really where we're looking for.
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We're looking forward to for this to have worked in this case, it didn't.
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It should have.
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If we if it worked, it would have been breaking through a number two at this point and then establishing
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or re-establishing that strong ten trend after a temporary pullback.
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That's what we would look for, is that breakthrough of the number two of the higher highs.
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And it didn't.
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Instead, it went down and maybe this went down a couple more days, a couple more red bars.
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And we're seeing well, maybe we're just seeing a little pullback, a little narrow trading range that's
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going to go back on trend, going to try to come back to that number two and go higher high.
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But it never did.
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In this particular example, it went down to the number three line, the test of the previous significant
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low, and then broke right through it.
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Right.
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It broke through.
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And that's your confirmation.
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As soon as it breaks through, that's enough confirmation and you're selling at that point, you know,
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to get out once it breaks through that.
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So as you can see on this example, I would have made more profit in this example if I would have sold
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at number one, if I were to follow the rule not, you know, tried to test for a pullback.
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You know, if it would have broke through a number two, then I would have been rewarded on that.
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Right.
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So the idea is you're looking at other confirming factors.
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You're looking at things to see how temporary this pullback is or if it really is a reversal like in
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this case.
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But even by setting my three out, the previous significant low between when I bought in that previous
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significant low, I made profit.
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I did not make as much profit as I would do from the Green Arrow up to the number one where I sold in
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this example.
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But I would have still made some profit and tested out the the pullback there.
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So this isn't a case where it didn't fully work out as far as it worked out in terms of still getting
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profits but didn't work out as far as hanging in there through a pullback and then breaking through
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number two.
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And that's the idea of the one, two, three rule.
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You're looking for it to break through a number two and then your downside.
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You're protecting yourself with the number three as far as your significant low confirmation.
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