Updated: Sep 15, 2020
The 1-2-3 pattern is a common chart pattern which occurs very frequently and has a very high success ratio. These 1-2-3 patterns often form at the beginning of new trends and swings, and they are a strong indication of a change in trend. They can also be found within a trading range, and they take place when the directional momentum of a trend is diminishing.
We call the 1-2-3 pattern the DNA of price action & the formation of a valid 1-2-3 pattern indicates the beginning of definite patterns to follow.
We are thus looking for bigger moves when we identify this pattern & this has a distinct advantage when used for trading currencies, since Forex tends to have strong trends.
In the illustrated example above, we have a typical 123 formation forming at the beginning of a new uptrend.
If we look at the fundamental reason for the forming of this pattern, we can see why it works so well.
The existing (down) trend continues with a formation of a new low (pt.1)
There is a breach of the previous high (pt.2) indicating a reversal of the existing (down) trend. At this point, everybody would be going long creating the extra momentum for the upwards trend. This is because trader’s, who had anticipated the downtrend to continue, would have placed their stops above point 2 of this formation.
When these stops are hit, these breakout traders will tend to cover their positions by going long, driving the price up with thrust.
The final confirmation seen, when there is a failure to make a new low (pt.3)
But trading this pattern in the conventional way has certain drawbacks.
The standard entry into the trade is the break of the (high) of pt.2 and the standard level for the stop loss is below pt.1. This increases the risk of the trade to a large extent, thus skewing the Risk-to-Reward ratio. To overcome this, we use certain Fibonacci tools to ascertain an early entry & a tighter stop loss. And, since this pattern usually leads to much larger patterns / larger moves, we get into a high probability trade with a much smaller risk & higher profits, which is what a trader should achieve.
Interested in learning more about this pattern?
Write to our founder and pattern expert Sunil Mangwani at email@example.com!
In the meantime, here's some extra material you can look through:
1. Magazine publication with more info on the 1-2-3 Chart Pattern (click here)
2. Full length webinar on the 1-2-3 Chart Pattern: