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## Victor Sperandeo - Technical Analysis and the 1 2 3 Rule

Vic Speradeo has traded for such famous traders as - George Soros, Leon Cooperman and BT Alex Brown. His market crash prediction during the September 1987 Barron’s interview earned him widespread fame and he is frequently featured in media and has authored several best selling books.

Here we will look at some simple trading rules he introduced in his first book Trader Vic Methods of a Wall Street Master.

In technical analysis Spreandeo follows various standard technical indicators to define trends and lock into them. The following are methods which are simple and are used in his trading strategy. First let's look at his definition of a trend and trend line and then look at the 1,2,3 Rule, the 2b Rule and the 4 Day Rule.

### Definition of aTrend

• An uptrend is a sequence of prices which move tosuccessively higher highs, punctuated by pull backs, with each pullback low ending above the previous pull back low.”

and conversely for a downtrend:

“A downtrend is a sequence of declines to successively lower lows, punctuated by rallies, with each rally high ending below the previous rally high.”

From the definition of a trend, a trend line can be given a precise definition.

*”An uptrend line is drawn under prices, joining the lowest low to the highest pullback low which does not pass the line through prices in between. The line is then extended past the date of the highest high”.

The condition that the line must not pass through prices between the points it joins means that it's not necessarily the most recent low which is joined, but might be only a prior one. When the line is extended to the right, it might then pass through prices, that's a possible indication of a trend change. A downtrend line is defined similarly,

*”A downtrend line is drawn above prices, joining the highest high to the lowest rally high which does not pass the line through prices in between. The line is then extended past the date of the lowest low”

The 1-2-3 Rule

Sperandeo identifies a change of an uptrend as:

1. Trend line (defined above) broken.: 2. Prices no longer making new highs.: 3. Prices fall below a previous minor rally low

Or conversely for a down trend:

1. Trend line (defined above) broken.: 2. Prices no longer making new lows.: 3. Prices fall rise above a previous minor rally high.

Either of 1 or 2 is a probable trend change. Two of the three conditions is an increased probability of a change. All three is the definition of a trend change.

The 2B Rule

Point 2 above is really the failure of prices to carry past a previous rally (or previous sell off). Sometimes prices go just past then they immediately reverse direction. Such a case is Sperandeo's rule 2B,

• 2B. If prices rise just above the previous rally high but then immediately fall back down.

Or for a down trend change:

• 2B. If prices fall just below the previous low but then immediately rise back up.

Sperandeo regards 2B as a powerful pattern, and in assessing the probability of a trend change he weighs it higher than any other single criterion. The advantage of a 2B is that it lets the trader get in at almost the exact top (or bottom) of a move (with stop protection at the failed high or low).

Even if the rule worked only 1 in 3 times, the risk to reward is so good, it can be a highly effective and lucrative way to trade.

The Four Day Rule

The four day rule is Sperandeo's favourite set up for a change in the intermediate trend. The rule is
“ In an intermediate trending move, a reversal in the form of 4 days against the trend is highly likely to lead to a trend change”.

He defines a variant as the "four-day corollary",

“In an intermediate trending move, a sequence of 4 days with the trend followed by 1 against is highly likely to lead to a trend change.

This rule is looking for a climax over a series of days, instead of a single high-volume climax day.

Trader Vic — Methods of a Wall Street Master

This is simply a book every trader should have on their bookshelf and contains a bit of everything from trading strategy, to money management to psychology.

"Victor Sperandeo is gifted with one of the finest minds I know. No wonder he’s compiled such an amazing record of success as a money manager. Every investor can benefit from the wisdom he offers in his new book. Don’t miss it!" —Paul Tudor Jones Tudor Investment Corporation

"Here’s a simple review in three steps: 1. Buy this book! 2. Read this book! 3. See step 2".