123 Pattern Reversal Strategy Backtest

Please note that trading, especially margin trading contains high risks of losing a deposit. These products may not be suitable for everyone and you should ensure that you understand the risks involved. To contact the author please use the email address below. More reliable signals within a trend retracement occur when a Point 2 breakout indicates the end of retracement and continuation of the main trend. Another signal from the RSI that we can take is the regular divergence signal. Matching 123 signals with RSI divergences will give us a higher probability trade on the 123 reversal pattern.

These traders will also place their buy stops near Point 2 . With regard to the pattern, to which several previous materials have been devoted, the formation of consolidation allows us to talk about the varieties of the pattern. Often, the trading range is formed within the wave 2-3, but a wider spread of waves should not scare you, because it allows you to implement a variety of strategies.

Divergence allows a trader to effectively enter a short position. We have a bearish trend at the beginning of the chart. We confirm the presence of Pivot Points 1, 2, and 3.

As for technical analysis, you are probably are already doing technical analysis. The other type of analysis is called fundamental analysis and uses financial statements and examination of the company itself to predict future price movement. And if you want to ride the trend till it’s over, you can set trailing stops to follow the price. However, you have to be careful when setting a trailing stop. Don’t set your trailing stop too tight or too loose. But it would help many beginners recognize many trend peaks.

The first one is the ability to recognize potential trend reversals. Without doing this, they would miss out on reversals a lot. It’s important to remember that there’s no one-fits-all solution. Let’s find out how the oscillator behaves around Point 1. If a pattern indicates an uptrend reversal, Stochastic must be in the overbought area. If a pattern signals a downtrend reversal, Stochastic must be in the oversold area.

In this lesson I go through exactly how to find the 123 reversal and how you can use it to great affect in your trading. The bigger the distance between Points 1, 2 and 3, the more likely you’ll lock in a profit. Again, we have the RSI indicator at the bottom of the vantage fx broker review chart. Let’s take a look at an example of the 123 forex strategy. To measure the size of the pattern, you will need to build a couple lines yourself. Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

The 1 2 3 Chart Pattern

The second is trading the “standard” break of the number 2 point and the third is to trade the retracement after the break of the number 2 point. My favorite entry is cheating the number 3 point as this can be done with very little risk, fairly large trade size and works quite well. Now that the latecomer sellers are gone, prices will start to move up again. And of course, the smart money folks are more than willing to take their profits as the market goes up.

The trading setup fired a long position as the market broke above the level of Pivot 2. Look for retracements that break major bullish trend lines as a sign of bearish momentum. The 123 can be used on many time frames to identify that particular time frames trend or potential reversal. 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. Below is a real chart of a 123 bullish trend reversal taking place. Pipbear.com is a blog website dedicated to financial markets and online trading.

The confirmation of the 123 reversal pattern lays at Pivot Point 2. The target when trading a 123 formation is at a distance equal to the size of the pattern, applied beyond Pivot Point 2. 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.

Once a breakout occurs, traders waiting for a reversal will go long. Long positions opened by traders hoping for a trend to continue, will get closed by stop-loss orders. The first element to look for in a 123 high is a strong uptrend. 123 reversals happen all the time in the context of trading ranges and consolidations.

The 1-2-3 pattern filters

The confirmation of the pattern is shown by the green circle, when the price breaks the Pivot Point 2 extreme. At first sight, there is nothing particularly special about this chart pattern. After all, every price move in the market will create a pivot point occasionally right? Yes, but if you have the ability to identify and confirm the umarkets broker review: a strong trading partner, it can help you predict potential reversals. The 123 pattern reversal strategy is very popular among traders, yet just a tiny few traders have backtested the strategy.

The beginning of every trend correction is a potential Pivot Point 1. If the 123 chart pattern is valid, then the price is very likely to break its previous trend line after creating Pivot Point 1. To set the target trader needs to connect 1 and 3 pivot points with a line. The size of your 123 pattern equals the vertical distance between Line 2 and the midpoint of Line 1. You can get the code for the 123 reversal pattern strategy together with plenty of other different strategies. In the second case, the market is in a downtrend, making a series of lower swing lows and lower swing highs, which is characteristic of a down-trending market.

Measuring the size of the 123 Forex trading pattern

Sometimes after reaching the top, the market falls down like a stone, sometimes it starts to lose momentum and form consolidation ranges. As a rule, in the first case, large players do not have time to take profits at the optimal level, as they cannot find the required number of buyers. Alas, this is just a deception, a trap created in order to take money from the plankton. The number 1 point occurs at a place where traders who were long in the market decide they need to secure the profits they made during the trend up. It’s also why you should watch for this point at a place of strong resistance.

• In this scenario, even a trading system with a probability of less than 50% will give positive financial results.
• I like to see volume confirmation, but there’s usually much less enthusiasm for this high than the number 1 high.
• However, you have to be careful when setting a trailing stop.
• On the other hand, a more aggressive trader might want to buy before the price crosses the B line.
• The trading setup fired a long position as the market broke above the level of Pivot 2.

It focuses on catching a reversing bull trend by taking on a short position. Whilst the 123 reversal pattern is a simple three part formation, it can be used in many scenarios and with a lot of other price action strategies. An example of this is below; price formed a bullish 123 reversal pattern, confirming with the breakout higher. Whilst this pattern can be used to spot trend and market reversals, it can also be used to spot new potential trade opportunities.

We all want to try and pick a bottom for a Long position entry point or a top for a Short position entry point. Learning to recognize this pattern can help you do tokenexus crypto exchange review just that. Depending on your account size, you could have traded 5-7 spreads easily since each spread only had a $345 buying power reduction in your account.

We always want our patterns and indicators to provide confirmation or divergence as a way to signal a buy or sell signal for our trade. But are reversal trading strategies really inferior, riskier and should be avoided? From anywhere between the Pivot 3 of the pattern and the recent low, price makes a U-turn to continue its downtrend movement. The retracement from the short uptrend is your Pivot 2.

CCI Divergence Indicator

The breakout in Pivot Point 3 will give us a signal that the trend is resuming. In this case you should consider trading in the direction of the previous trend. The interesting thing about this trading example is that the 123 reversal chart pattern acts as a double bottom. And we trade it very similarly to a double bottom chart pattern. Then, suddenly, we see that the price breaks the trigger line of the 123 chart pattern, which we could take as a long signal. The black dots show the Pivot Points of our 123 chart pattern.

How to Identify a 123 Reversal

You see this pause (it’s just a pause right now, we’ll have to see if it turns into anything more than that) happening right at a historical area of congestion. All I had learned in those five years came back to me in a flash. I guess I was paying closer attention to it than I realized. Then I became a profitable trader in just a few months. I joined Casey’s team at Trading Strategy Guides thereafter as the Asia Session Trading Room Moderator. We can label point 3 just as we did point 1, right after it occurs to verify that it was indeed a higher low.

Project this distance from the breakout point to get the estimated profit target. Sometimes, volatile market conditions can push the price to go beyond Point 3 for a short period, and it would reverse again to move as expected. Placing your stop loss beyond point 3 preserves it from getting triggered due to this volatility. The core of the technical analysis is to identify the trend… Pivot points are an excellent leading indicator in technical analysis. Remember that everything I said about a 123 high applies in reverse to a 123 low.

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. Some traders using the 123 reversal don’t wait for the recent high or low to break, but for the pattern to confirm we need to see price move above or below. The first of them is closed when profit reaches the stop order , which is then moved to the breakeven point. Reverse trades for the second and third lots are made when quotes fall to the 2R and 3R levels.

We do this by measuring the size of the pattern and applying it starting from the confirmation level as shown with the pink arrows. At the same time, the RSI indicator gave us an overbought signal, which confirmed the bearish idea on the chart. 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.

Later on, the price breaks the flag in the bullish direction and hits our take profit line. If you are not trading with a take profit order and relying on price action alone for collecting your profit, here is how you may have analyzed the price action. At the beginning, it might be hard to spot the first two Pivot Points on the chart. However, when the price closes a higher bottom at Pivot Point 3 and then closes a candle above the blue bearish trend line, this triggers some bullish thoughts. At the same time, the first rectangle on the RSI indicator shows an oversold market condition. Below, we have also added the approximate area of your take profit order during a 123 trade.

Buy Sell Magic Indicator

Alternatively, you can use different support/resistance levels as a take profit. The reason why a pattern plays out is because a bunch of orders are activated in Point 2. If, before the pattern, there was a bullish trend, trend traders will use a trailing stop loss. On the other hand, traders are hoping for a retracement or reversal.

Soon after forming the new low, it makes a temporary retracement to the uptrend. In an ideal Ross Hook pattern, this retracement must not go past the pivot 3 of the pattern. Before we take a deep dive into the steps, recall that the pattern is used to trade trend reversals. Whilst commonly used as a trend reversal pattern, you can also use the 123 to spot when a range is breaking or looking to potentially break.

As I’ve said, charts reflect the emotions of traders. Certain 123 pattern strategies occur regularly on charts. We’ve all seen head and shoulders patterns, various triangle and flag patterns and the more complex harmonic patterns. The reasons these patterns continue to provide trading opportunities is that the emotions that caused these patterns are consistent and happen frequently. At this retest it rejected the breakout area and formed a bearish pin bar reversal setup.