HOW TO TRADE 1-2-3 PATTERNHello everybody! 👋 🤗. Today we are going to learn about the 123 chart pattern. The 123 pattern is a typical reversal pattern that traders use to identify if an existing trend might change. These patterns can be a signal to enter the market. At the peaks or bottoms of the market trend, you can see 123-patterns, which signal a change in the trend. Sometimes they form after the completion of corrections in the current trend and may also occur in sideways markets.
The Pattern Formation 📈
1. The price makes a pullback following the rally
2. The price hardly shows a new maximum/minimum. No sign trend continuation
3. A breakout the previous high/low, shows a change in market trend
This happens as a result of traders opening positions when they anticipate the rally is going to continue. Furthermore, these traders will immediately close their trades and enter in the opposite direction if their stops are taken out.
How to Identify a Solid Pattern ✔️
1. The first step in trading the 123 pattern is to determine the existing trend by analyzing and identifying the highs and lows of the price action. The chart below shows one of the setups; it is labeled 1, 2 and 3. The trend was bullish. The market reached a peak. Then a pullback occurred. The result was point 2. Price then attempted to retest the high which was not successful. The price started a bearish movement and then reversed. We should not open the sell trade until we get confirmation of the breakout of line 2.
2. Look for a potential reversal. After identifying the existing trend, the next step is to look for a potential reversal point. This is done by looking for high or low points on the chart. Once a potential reversal point is identified, we can then look for signs that the reversal is actually happening. These signs can include things like a change in price momentum or candlestick patterns. The candlestick that represents the first point should have a wick, and the longer it is and if the wick is directed against the main price movement.
3. Once a potential reversal point has been identified, the we should wait for confirmation that the reversal is happening before taking any action. This confirmation can be provided by a subsequent candlestick close above or below the reversal point 2.
4. Finally, we should place stop-loss and take-profit orders to manage out risk and lock in profits. A breakout of the previous high (or low, depending on the context) is the area to place the orders. Depending on whether the pattern is bullish or bearish, the stop loss should be placed at level 1 below or above. Price should be given breathing room to avoid hitting the stop loss. Determine the distance between the low at point 3 and points 1 and 2 in this formation.
As you can see from the previous example, the price initially was in the bullish trend. After the pullback, the price breaks the support line of the trend, signaling a trend shift which indicates that price doesn’t have enough momentum to move above the previous high. Stops should be placed above point 1 of this formation. This illustration shows how easily the price exceeds price target, providing an opportunity to successfully open a sell trade with R:R ratio 1 to 1.
The 123 pattern can be a great tool for traders looking for a simple yet effective way to open trades in the markets. It is important to remember that no trading strategy is perfect, and traders should always use risk management to protect their capital. With practice and experience, traders can learn to identify the 123 pattern and use it to trade successfully in the forex market.
