1-2-3 system strategy

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1 2 3 Reversal Swing Trading Strategy

The 1 2 3 reversal is a price action trading pattern that can easily form the basis of a trading strategy.

It is a simple price pattern that is simple to spot on your charts and many swing traders will find it easier compared to other more advanced swing trading strategies and systems.

As with any trading strategy I talk about on my blog, location is important and the 1 2 3 reversal is no exception.

You can use this price pattern in a few ways including:

  • Finding a trading position in the direction of the trend
  • Being a counter trend trader and looking for quick hit reversal trades
  • Being able to position inside of a full trend reversal from downtrend to uptrend and the opposite as well

Regardless of how you use it, you must fully understand the risks in trading as well as keep your risk parameters conservative so you can withstand any losing streak.

You can see there is nothing complicated about this price pattern and the 1 2 3 reversal is simply a breakout of highs or lows after an impulse/corrective move in price.

Breakouts fail so the most important aspect of the 1 2 3 reversal pattern is what price does on and directly after the breakout. You want to see price acceptance of the new high. Of course there will often be a pullback after the breakout (Ross Hook), but that does not make this price pattern invalid.

In fact, the pullback after the breakout can be a way to add to your position.

1 2 3 Reversals – Daily Chart

This is a high level overview and while you may find this enough to trade, others will look for other variables to line up.

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What’s important to notice is that the #3 point also becomes the #1 point as the first pattern resolves. A break of the green dotted line can be your trading entry.

You can see at the last pattern very clearly – a price pullback does not make this trade invalid.

Rule Base The 1 2 3 Reversal Setup

It is easy to see anything you want on a chart. Our eyes love to see patterns where they don’t really exist.

One technique you may want to use to determine if the potential 1 2 3 setups you are looking at is a possible trade, is to use a Fibonacci retracement zone.

There is NO magic in Fibs so don’t believe that this is the most important aspect of this reversal pattern. What it can do is make sure that you are seeing a true pattern that has a real retracement as opposed to a simple consolidation pattern.

1 2 3 Reversal – Fibonacci

I set my Fib ratios to .382 and .786. As long as price finds its way between these two ratios, I could potentially consider this a trade setup.

Another thing that needing a measured zone for price to pull back in to is it can help prevent you from entering a potentially over extended market. Over extension will often lead to mean reversion and entering a trade just prior to mean reversion can make for a painful trade.

Entering The 1 2 3 Reversal Setup

One of the easiest ways is to just trade the breakout of the pattern. I have not done any back testing on it but I don’t see how that would be an edge especially if you believe that most breakouts will fail. Maybe they won’t just fail, but we’ve seen quick pops above/below #2 that could trigger you into the trade which all traders have probably experienced.

Another way to enter is to monitor price as it approaches swing #2. See if you can find some type of consolidation on your trading time frame or even a lower time frame. This will position you before the breakout and if the breakout succeeds with momentum, you will find yourself in quick profits.

Other traders may want to enter near location #3 as it will give you a larger profit profile and you can be in profit before the breakout which means any failure of the breakout, won’t cost you as much.

Stop Loss Location

You can use somewhere below or above the #3 or use an ATR stop that measures the volatility of the market. Just ensure you are not placing your stop loss too close to market action. The main drawback of the 1 2 3 pattern is that stops can be fairly large depending on the length of the 2-3 leg.

Traders may, once they recognize the pattern on a higher time frame, drop to a lower time frame and look for the same pattern on a smaller scale.

You will get an earlier entry and a smaller risk profile as well. You should consider using the same stop location as you would on the higher time frame chart. With an earlier entry off the lower time frame 1 2 3 reversal, you will have an opportunity for a slightly larger position size.

Take Profit Targets

You can use the same pattern to exit the trade as well. Consider a market in an uptrend and you’ve entered early on in the move.

1 2 3 Trade Exit

Once price takes out #1, you exit the trade regardless of the profits you have accumulated. Traders may notice this is a violation of higher highs and higher lows you need for an uptrend. That is correct. You exit when you see price is no longer respecting the stair stepping trend direction pattern.

Another profit taking approach is to use Fibonacci extensions.

1 2 3 Profit Targets – Fibs

Managing Your Trade

There are many different ways to manage a trade from multiples of risk to price action patterns. I like to keep things simple in regards to managing my trades with any trading strategy.

Being a risk manager is my first job.

  1. Once I am in profit at 1R, I will bank a percentage of my profits. The actual percentage will depend on the strength of price but anywhere from 25-35%.
  2. Depending on the size of the trade, I may or may not move my stop to break-even. It depends on how far price has traveled. I don’t want a protective stop too close that it is hit by fluctuations in the market that don’t challenge the trade.
  3. You can take further action at 2R and 3R or use Fib targets to scale out or exit fully at the 2.0 which is the length of 2-3 of the 1 2 3 reversal pattern

Hope this helps and please share this trading post!

1-2-3 system strategy

Strategy is called 1-2-3 which by the name itself sounds really easy. It definitely does not have nothing in common with marketing tricks or to sell you anything. It is called this way because it uses three points chart pattern. So it goes like this. First we need point 1 which needs to be highest tip on the chart. You enter with the trade once the support or in other case resistance which is formed by point 2 is broken. But i have to point out that you do not have valid 1-2-3 system strategy pattern if 3rd point is lower then point 1. We also do not have system set up if 3rd point is higher then point 1. So, if in any time the 1st point is surpassed by 3rd point in different direction, you can not apply the strategy. Example, how it should look:

WHAT CAN GO WRONG?

You have to be sure that you do not enter such trades randomly and anticipate what is going to happen because going against the trend is risky, that is why it is important to remember the last rules that were mentioned. If we go through it again quickly, nothing can pass point 1. If it does, then do not trade because it is too risky. Be sure if you are new to the binary options trading and analysis that you do not get confused with highs or lows.

WHY IT IS GOOD?

It is used for many years now which means it provenly tested it works. They use it in forex, stock trading with support and also resistance principle in mind. Now let us look at second example. You can see how all the highs and also lows are numbered. These are all opportunities which would be successful in this case. In this particular example, doing a trade is when 2nd point is broken.

HOW TO START USING 1-2-3 STRATEGY?

You definitely need to look at proper charting software and not on binary options platforms to use this strategy. Use japanese candles and time frame you like to trade but have in mind bigger picture of the chart if you are trading short terms. The best to describe it again is by picture so take a look and you will see.

As you see from the picture, you ONLY do a trade when the point 2 is surpassed and not before. Same thing applies to uptrend just all is reversed basicly. Just have patience to wait for the pattern to reveal itseld and then take a trade. By not following the rules the trade can easily go against you.

FINALE

This strategy is among favorite ones because it is simple but it also has alot of profitabiltiy chance if used correctly as you can see. Of course you can not strike 100% of the trades simply because market is doing its own way that can not be predicted as you would want. Overally it is a good strategy for beginners to start with.

Learn The Powerful 123 Forex Trading Strategy

The 123 Forex trading strategy is based on price action and normal Forex market structure that any trader should know. The 1 2 3 trading strategy is used as a continuation trading setup that is designed to take advantage of the trend of the market.

The failure of the 123 trading strategy is also a trade setup but can also warn you of potential price consolidation in the market or even a trend reversal in whatever Forex pair you are watching.

Keep in mind that even though it is a continuation pattern upon confirmation, it is also a reversal pattern from the short term trend direction.

1 2 3 Trading Pattern Formation

In any trending market, there is a pattern of higher highs and higher lows. In order for the trend to the upside to remain active, each successive impulse swing must take out the point 2 in the formation. When price surpasses the price at #2, the trader can use that as confirmation that the 1 2 3 chart pattern is present.

This is a line chart that explains the concept of the 1 2 3 trading pattern and in this case, we are assuming an up trending market

1 2 3 Trading Strategy

Let’s walk through each number and this pattern should be familiar to any trader who’s been looking at charts for a while.

  1. When an uptrend pulls back, it will put in a low and from that low, price continues to rally.
  2. This acts as short term potential resistance. Price rallies to this point and then begins to retrace back in the direction of the price at #1. We DO NOT want to see price retrace all the way to the price at #1. If it does, we will consider that to be the formation of a double bottom chart pattern and would trade that according to the trading plan you have set up for that price pattern.
  3. This level is also considered a #1 only when the price level at #2 is broken. This price point is the level at which the corrective move completes and the price reversal to the upside begins.

Please note that the 1 2 3 price pattern is only confirmed once the high at point #2 is taken out by price.

You can also see that the 1 2 3 trading strategy is taking advantage of the stair step nature of the market that is needed if a trend is going to continue. It is at the confirmation of the patter that a trader can place a conservative trading position in the market.

1 2 3 Chart Pattern By The Numbers

In an uptrend market situation, price will make 3 points

  • Point 1 is the lowest low point, forms a support level.
  • Point 2 will be the peak or the highest point, forms a level that we consider as potential resistance
  • Point 3 will be the 2nd low point, a support level ( which must be higher that the point 1 which is the lowest low point ).
  • The breakout of price above point 2 signals the continuation of the uptrend.

In a downtrend market, the 1 2 3 chart pattern forms when:

  • Point 1 becomes the highest peak when price finds resistance and moves down.
  • Point 2 becomes the lowest low point (forms support) and price moves up
  • Finds another resistance at point 3.
  • when price breaks the point 2 support level,it indicates that the market is most likely to continue downward

Trading Strategy Trading Plan

Let’s take a look at a potential trading method to trade the 1 2 3 trading strategy. We will look at a conservative method for those traders that need a little extra confirmation in their trades.

Keep in mind there is a cost involved. The longer you wait to get involved in a trading position, the larger you will have to make your stop loss.

123 Trading Plan

Trade Setup 1

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 1 2 3 trading strategy needs a breach of #2 to confirm the pattern, so does the double bottom.

If you do get a double bottom after a move in price, that could signify weakness in the market. If bulls were fully in chart during the retrace at 2, we should not see two shots at the level #3.

Price breaks above #2 and you can either enter at the breakout or, my preference, take a position at the close of the candlestick to confirm a true break. You can also put an order to buy slightly above the candlestick that broke the #2 level.

Your stop loss should be below #2 with buffer room to allow for noise. You can also, my preference is coming, use a 14 period Average True Range x 2.

Trade Setup 2

Price rallies from #1 and gives us a strong reversal candlestick at #2. Once price begins to retrace, put this currency pair on your radar. Price find support at #2 (inside the previous consolidation pattern from trade #1) and shows strength as it rallied to #2.

Once price shatters the #2 price zone, enter at the close of the daily candlestick (or whatever time frame you are using) and use an ATR stop. The average true range stop for this trade would actually be in the middle of the candlestick that printed just before the breakout candlestick.

Trade Setup 3

Each trader should understand this pattern by now so let’s focus on the range that is occurring. We have most variables need for the 1 2 3 trading strategy but price is forming a range near the level at #3.

That is NOT something we want to see for a clean 1 2 3 chart pattern.

When price is basing in this fashion, it shows that the side that was dominant, in this case bulls, have tired. As a trader for years, I have seen the following occur:

  1. Price trends nicely
  2. Weakness shows up in this fashion
  3. Traders will take another run to the upside, break #2 and then see this fail back inside

This formation of the consolidation is also a great trade entry into the potential of the 1 2 3 chart pattern continuing.

We can position early in the 1 2 3 formation when we have basing occurring. Ideally, we would like to see some form of basing near the resistance level (red line). You can see the green dashed line and then price rockets to resistance.

That is not conducive to a sustained break of resistance.

The more favorable setup is to have either basing near the extreme or a slight pullback in price which we see with orange box. The break out then occurs after that pullback.

Those types of breaks are more effective and see if you can understand why. Some would think the first break would carry more weight because the drive started midway in the range.

But traders who positioned lower will also look for scalping Forex trades at the top of the range – is that not how you play a range?? Yes. The breakout that occurs is driven by traders who went long at the bottom of the range.

Let’s see some detail in this chart

  1. Price could not rally far from the low which is showing the 1 2 3 chart pattern – the stair stepping in a trend – is under attack. Price can’t break lows so traders go into range trading mode
  2. The formation of this smaller range allows traders to position with a tighter stop loss just under the small range.
  3. You can see there was a drive to this level and then a very weak candlestick shows up. This is either traders positioning short in the range or the longs taking profits.

That is the type of thinking you want to have as a trader. Do not trade blind!

What Is Your Entry Strategy?

As discussed, you can enter at the close of the break out candlestick (signal candlestick) or entering your trading position at a break of the high.

Some traders may want to use a multiple time frame approach and enter on a lower time frame. In my own trading and in my years as a trader, I look to simplify. Entering at close or breaks of support levels or resistance levels (highs and lows of breakout candlesticks) is my favored entry

Taking Your Profits

Some traders would like to see specific price targets to add to their trading plan. Other traders see the power of trailing their stop loss to take as much as the market is willing to give.

You can use structure targets such as higher resistance levels in an uptrend.

You can use legs 1-2=3-4 which suits the 1 2 3 trading strategy.

One to One Targets

I color coded each swing so you can see where I am measuring from. I use the 3 point Fibonacci tool and set it to the 100%. You can see the first two trades nailed the targets. The third trade hits the .618 Fibonacci level which is quite popular when used to portion out swing points.

Summary

The 1 2 3 trading strategy is a pure price action trading method that uses a sound approach to trading.

No trading indicators are required although I do suggest the ATR for stop loss placement.

You must have a proper risk protocol as part of your trading plan.

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