The 123 system is a breakout system. Basically, we number the highs and lows of the stock.
In an uptrend, we label 1 as the first low, 2 as the high and 3 as the second low.
3 has to be higher than 1 in an uptrend.
When the stock rebound at 3 and breaks through the 2 level, then we go long. It is that simple!
Why this works? Read through the Psychology of Support Resistance again. Basically, when the stock rebounded at 3 and hit level 2, the 3 group of people decided to cancel sell orders and break through it, and resistance has now turn into support.
