Trading the 1-2-3 Reversal Pattern Setup

I accept FBS Agreement conditions and Privacy policy and accept all risks inherent with trading operations on the world financial markets. Sometimes the breakout candlestick may be very long, which means your stop loss distance will also reflect this. This is a straightforward price action trading system with clear trading rules. Place your stop loss 5-9 pips below the low of the breakout candlestick.

The 123 setup could also work as a continuation pattern. The stop loss order should go above the level of Pivot Point 2. We should apply the target downward, starting from the confirmation level at Pivot Point 3. We do this by measuring the size of the pattern and applying it starting from the confirmation level as shown with the pink arrows. In many cases, the continuation version of the 123 chart pattern will have the characteristics of a wedge, a flag or a triangle. However, since the pattern confirmed a continuation, we need to apply its size in the direction of the continuation.

If this low is broken, the pattern did not occur. First, let’s think about when a low, or bottom occurs. We know a bottom occurred after the fact, and we recognize it as a bottom when a higher low forms. We all want to try and pick a bottom for a Long Renesource Capital Review position entry point or a top for a Short position entry point. Learning to recognize this pattern can help you do just that. And finally, the so-called Ross Hook (basically another 1-2-3), which is the first retrace after a successful formation.

The pattern identifies the direction of the current trend. During a strong directed movement, each new low/high is lower/higher than the previous one. With the help of this pattern, a trader can find out whether the market is dominated by bulls or bears, or the price moves in a trading range. As soon as the familiar sequence is broken, it’s an indication of a trend reversal or retracement.

123 pattern

Inside the sideways range, price had formed a lower high and was looking to complete part #3 of the 123 pattern with a breakout lower. A closer look at the price action before the breakout shows that momentum was building to a breakout lower with a 123 pattern. This can be incredibly handy if you are a breakout trader or you look to make breakout and quick retest trades. Being able to spot momentum shifting could put you on the right side of the market. When traded correctly the 123 pattern can be used to identify market reversals, potential trade entries and to help with trade management.

2 3 Chart Pattern: How to Spot it and Trade it

In fact, when approached as a reversal pattern, the 123 setup is indeed either a double top or bottom. There are many ways to choose a take profit level. Another way is to wait for price to reach notable support or resistance levels and take profit from there. The StopLossClusters indicator are also great for choosing take profit levels. And of course, you could always ride the reversal to the end if you know how to. It is important to wait for the pattern to form completely, and that price breaks the support of the second pivot before you make any entry.

You should take Pivot Point 3 as a starting point of your target. If you are trading the IQ Option Overview as a continuation formation, then your stop loss order should go beyond Pivot Point 2. If you closed the trade at the target line, this would have equaled a profit of around 45 pips. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

123 pattern

No reversal trading strategy catches every reversal. In fact, every reversal trading strategy will miss a large number of trend reversals. Price forms a new low after it breaks the Pivot 2 support level of the pattern.

The target when trading a 123 formation is at a distance equal to the size of the pattern, applied beyond Pivot Point 2. If the price fails to break the level at Pivot Point 2, or breaks it slightly and then reverses quickly, then this was most likely a flatter correction. The breakout in Pivot Point 3 will give us a signal that the trend is resuming.

Forex Trading Strategies

Read this article and decide whether to use it in your trading or avoid it. The next turning point is very likely to form outside of the previous trendline or channel. This is a good indication that the trend might be ready to end and reverse. TweetInformation in VDOT news releases was accurate at the time the release was published. For the most current information about projects or programs, please visit the project or program Web pages.

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  • See that the price doesn’t hit our green take profit line at first.
  • It is a trend indicator used to measure the strength and momentum of a trend and most likely what I would use.
  • The chart above shows an example of the trend change method applied to downward price trends.

This is because this trend will help define your target. The trend should be fairly strong without a lot of retracements and pauses. The 123 Forex trading strategy is based on price action and normal Forex market structure that any trader should know. The trading strategy is used as a continuation trading setup that is designed to take advantage of the trend of the market. The 123 trend reversal pattern is super simple to spot, occurs frequently in the markets and can be a powerful price action clue. For the most part, a pattern forms at the end of a trend.

In this case you should consider trading in the direction of the previous trend. Although we are approaching the 123 chart setup as a reversal, it could also act as a continuation pattern. In other words, it could give us a signal that the trend is not reversing. Instead, we might be looking at a flatter correction, which could trigger a new move in the same direction.

The target level of 123 continuation pattern

I actually take as many as three different positions on 123 reversals – but we’ll get to that later in our story. You should be familiar with the numbers and what they represent on the chart. We can see that price rallied from point 3, found resistance at point 2 and retraced. We now have a double bottom chart pattern and just as the trading strategy needs a breach of #2 to confirm the pattern, so does the double bottom. U.S. Government Required Disclaimer – Commodity Futures Trading Commission. Futures and options trading has large potential rewards, but also large potential risk.

123 pattern

Because of these factors, I usually use about half my standard trade size on the first position. I then use half on the second entry and half on the third entry. I know folks that do it on the 1-minute charts and make lots of pips daily doing it. I just can’t concentrate that much for that long. You have to know your strengths and limitations to be a profitable trader. I tried to trade like someone else, but I couldn’t be profitable that way.

Your target is to use support and resistance from the left of the chart to put your target just below some prior resistance level. If you’re trading this pattern on a daily chart, then a gap up would also be a good place to sell. If you are trading this higher on a daily chart and a reversal bar forms, that would also be a good place to sell.

Recognizing The Ross Hook Pattern Formation

Contrary to this, if the trend is bearish and we spot a 123 reversal pattern, then we will try to match this signal with an oversold indication from the RSI. New forex traders may think identifying the 123 patterns complicated at first. Place your stop loss 5-10 pips above the high of the chart breakout candlestick. It is important to note that the continuation play works best in the direction of the trend.

We will cover the difference between the discretionary and technical entry, in a future lesson. Nevertheless, in tests I found that the method Key To Markets Forex Broker Introduction helps detect a trend change, so it adds value. Read my Trading Classic Chart Patterns book and the following for more information. is not a financial advisor. Do your research before investing your funds in any financial asset or presented product or event. We are not responsible for your investing results.

Also, it’s important to use price action analysis to improve your decision making. After all, the knowledge of another chart pattern emerging can always come in handy. The two purple lines are Line 1 and Line 2 respectively. The pink arrows apply the size of the 123 chart pattern after the price confirms the setup. The green horizontal lines show the area, which we expect the price to enter.

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