Once you’ve identified the 123 chart pattern in a downtrend, wait for a breakout candlestick. The breakout candlestick must breakout to the downside and close below point 2. The pattern can be combined quite successfully with the principles and tools of volume spread analysis .
Let us define the exit for this pattern by creating a “target zone” with a confluence of 2 different factors. While this pattern does not give any projected target, a minimum target can be estimated by the measured move concept. Again, we have the RSI indicator at the bottom of the chart. You should measure the size of the pattern building Line 1 to connect Pivot Point 1 and Pivot Point 3, and Line 2 horizontally through Pivot Point 2.
Learning To Trade The 123 Pattern Reversal Trading Strategy
As filters for the described graphical configuration, we can use not only price action tools, but also standard or non-standard indicators. The trader will play out the pattern only if they see a divergence – different locations of tops in the charts of currency pairs and indicators. For example, in a 4-hour time frame for EUR/CAD there is a discrepancy between the dynamics of the quotations and the MACD. In the chart, the tops in the growing market are declining, while the indicator consolidates their growth.
Buy signal near the support zone is signal for long entry. For the last 8 years, we have been providing a wide range of trading-related blog articles, trading guides, podcast episodes and tons of trading videos on Tradeciety. Tradeciety is run by Rolf and Moritz who have over 20+ years of combined experience in Forex, stocks and crypto trading.
Case 1 – Potential Trend Reversal
Sometimes the breakout candlestick may be extremely long which means your stop loss distance will also beg long reflecting this. If you don’t want to wait for the breakout candlestick, then you can place your sell stop/buy stop pending order 2 pips below/above the point 2. Some traders like to take advantage of the pattern, while others hate it. The latter, as a rule, are people who try to earn on each graphic configuration.
It is more important for that to occur with reversal 123’s. In a strong trend, the retracements can be as shallow as 23.6% or 38.2%. Draw your 123 points as price moves in the direction of the new trend. As indicators, we can use both trend indicators beaxy exchange review (as in the above example – MACD) and oscillators, some of which are based on the detection of overbought-oversold zones. Similarly price has to break the high of point 2 for confirmation. Allow the pattern to prove itself before entering a trade.
Trend Following System’s goal is to share as many Forex trading systems, strategies as possible to the retail traders so that you can make real money. You will see that price action formed the first leg lower, the second leg higher with a lower high and then finally price broke out and confirmed the pattern. Being able to identify when the trend or momentum is looking to potentially reverse can be very useful for most trading strategies. In the first case, a bullish trend turns into a bearish one.
I am a professional Price Action retail trader and Speculator with expertise in Risk Management, Trade Management, and Hedging. In this case, we have entered the market right after point 2 is broken, which is a little aggressive. By providing this information, Redfin and its agents are not providing advice or guidance on flood risk, flood insurance, or other climate risks. Redfin strongly recommends that consumers independently investigate the property’s climate risks to their own personal satisfaction. Climate risk data is provided for informational purposes only. If you have questions or feedback about this data, get help at riskfactor.com and climatecheck.com.
The 123 Pattern
Calculate the distance from the point 1 to point 2 in the formation. Add this to the low of point 3, and this should be the minimum distance that price will travel to. Once this pattern has been spotted, let us define some very simple rules for managing the trade. Price will make a swing low , retrace upwards to a swing high , where a downward correction begins. Price would then form another swing low , which is higher than the previous low . In the above illustrated example, we have a typical 123 formation forming at the end of a downtrend.
- Part #3 sees price make a new move back higher and importantly break the recent swing high of part #1.
- A long trade is then entered when price breaks the previous high formed at point 2.
- If the pattern is bullish, then you should place the stop order below the bottom of Pivot Point 3.
- The second and third set of internal 123’s continue to confirm the uptrend or downtrend.
- The 123 pattern is fully formed when price takes out the recent high of leg 1.
- You should measure the size of the pattern building Line 1 to connect Pivot Point 1 and Pivot Point 3, and Line 2 horizontally through Pivot Point 2.
This change in price structure can help predict a potential reversal. The 123 top and bottom is a very powerful pattern that signals a reversal of a trend. It is also used as a trend continuation pattern, which we will be discussing in detail shortly. First, let us discuss the 123 patterns as a reversal trading strategy.
The disadvantage of the 123 Chart Pattern Forex Strategy
At such times it is better to stay out, till price action confirms a direction. Since this is all that the pattern consists of, it is very easy to spot for a confirmation of the change in trend. The 123 pattern is a reversal chart pattern which occurs very frequently and has a very high success ratio.
However, this time the price fails to break the resistance at Pivot Point 2, turns around and breaks the level at Pivot Point 3. In this scenario, we suspect that the 123 trading pattern is very likely to act as a continuation here, and not as a reversal. The 123 reversal chart pattern is a three-swing price formation that indicates a potential reversal in trend. It is formed by three price swings or waves with three swing points, which is where the name of the pattern comes from. There is nothing special about the chart pattern, apart from the fact that the price swing is no longer making the expected higher high or lower low . However, the change in price structure can help predict a potential reversal.
A short trade is opened at the breakout price or at the closing price of the breakout bar. The principle “sell and hold” is not good for everyone, because after having lost profit several times, the trader begins to doubt bitcoin brokers canada its effectiveness. They can use the method of partial consolidation of a positive financial result by using various methods of position management. In particular, a rather popular approach is the use of profit factor.
You don’t want to get your stop activated due to this volatility. That’s why the smarter approach here is to put your stop slightly beyond that level. Your target level during a 123 trade should be at a distance equal to the size of the 123 chart pattern.
Structure of the 123 Chart Formation
The safest trades are taken in the direction of the current trend. Trade entry is easily done with the internal 123 formation. Also watch for reversal candlestick patterns at point 3 to trigger the entry.
I echo john’s sentiments above after trying lots of different trading ideas, the simplest ideas tend to be the ones that get results. I would also add in the importance of looking at where S/R is beforehand , Forex Trading for beginners so those patterns become more reliable. I dont think a stop below point B is ideal as that will quite often get taken out on a stop run; your stop should be below Point C – in fact some way below that even.
The strategy is suitable for trading in all currency pairs. However, it is suggested to look for the trading opportunities in major and few minor currency pairs only as the patterns are more reliable and evident in these pairs. You can apply this indicator for any Forex currency pair and in any timeframe, chart to look for possible pattern trading solutions. If you miss the initial reversal 123 pattern, look to get into the subsequent internal 123’s. And, wait for the candles to start trending again before entering. The 123 reversal trading pattern has the structure of a double top or a double bottom.