Sometimes, volatile market conditions can push the price to go beyond Pivot Point 3 for a short period. 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.
A 123 Reversal is simply a picture of that emotion on a candle chart. That’s what I call a 123 reversal that happens at the top of an uptrend. In the Forex market, everything that happens in an uptrend can happen in a downtrend. This is because currencies are traded in pairs, one against the other. For example, an uptrend in the EUR/USD currency pair is actually just the Euro trading higher and higher against the US Dollar. At the same time, the US Dollar is in a downtrend against the Euro.
At the same time, the RSI gives a strong overbought signal. The market starts consolidating and we see a candle closing below the lower level of that consolidation. This is a strong signal for closing the trade here.
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 123 pattern, it can help you predict potential reversals.
Continuation 123 pattern setup
This appears in the chart as point 1 and a trendline pierce is the first indication of a trend change. Find where price closes above the down-sloping trendline. This is shown in the chart as point 1 and a trendline pierce is the first indication of a trend change. Not only does his method Cost benefit analysis for beginners provide a consistent way to draw trendlines, but it helps determine when the trend has made a meaningful change in direction. Discovering when the trend changes and taking advantage of it is what trading is all about. Indeed, the market bounced up, allowing us to mark our Pivot 3.
For a bearish 123 reversal this would be a new lower high. Part #3 sees price make a new move back higher and importantly break the recent swing high of part #1. Price is moving lower in a downtrend before forming part #1. This is a move back higher against the trend or overall move currently in place. Part #2 is a move inline with the trend, but crucially a new higher low is formed. We can label point 3 just as we did point 1, right after it occurs to verify that it was indeed a higher low.
The 1-2-3 Continuation Pattern
Officially, your trade entry is a break of the number 2 point to the downside. Although, of all the possible 123 trade strategies, that’s my least favorite because it requires you to risk the most pips. Therefore, it requires you to trade with the smallest size.
Pipbear.com is a blog website dedicated to financial markets and online trading. 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. Take profit also equals to the distance between Point 1 and Point 2. However, you need to lay off this distance from Point 3.
One 5-minute bar includes five times more price in volume data than a one minute bar. As I mentioned, the risk is greater on the second entry. You need to place your stop a few pips above the number 1 point.
The volume is a signal that the smart money is passing on their holdings to the latecomers, leaving them „holding the bag“. 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 retracement from that point gives you your Pivot 1. The picture shows an hourly chart, but a 123 reversal can occur in any time frame since it’s showing you the emotions of traders. It is not necessarily depicting a particular event. I prefer to look at them on an hourly chart or higher.
Trading Strategy Trading Plan
However, you can get better at identifying them by constant practice. There are many ways to set your stop loss when you are looking to make a trade entry with this pattern. The Forex Economic Calendars: An Overview most common way is to set your stop loss above the recent high in the case of a downtrend. And for an uptrend, the stop loss should always be underneath the most recent low.
- You’ll get used to finding them and they’ll just jump off the screen after a while.
- This causes prices to drop back to the number 2 point – often breaching the number 2 point by a few pips.
- They can give you a feel for the direction of the market.
Continuing to move beyond Point 2, the price forms a new low which is higher than the previous one. This means that the price is too weak to break the last low and form a lower low. There is still a possibility that we’re looking at price consolidation rather than a trend reversal.
Step Up Your Trading!
By using these two time frames together you can get in at the low of bar 2. It is tighter than a technical entry, and it will help you have less risk and more reward inside the pattern itself. Those three pivots make up the high reversal pattern. For low, it’s all about flipping the pivots on their heads. For instance, you look for a strong downtrend and wait to see a retracement from the lowest point of the trend.
The retracement from the short uptrend is your Pivot 2. Your Pivot 3 forms in between Pivot 1 and Pivot 2, when the market temporarily returns to the downtrend before making a final U-turn to the uptrend. Slava Loza Forex Trader & Analyst Another crucial ingredient trend reversals can’t do without Just2Trade Forex Broker Review is strategies to trade the trend reversals. Hey, Tim, thanks for the clear and logical explanation. Be sure to stick to the rules and don’t take profit too early or you will kill the profitability of this strategy. And remember not to freak out if the trade goes against you and/or stops out.
Above we see a good example of how you can trade this pattern using two time frames of confluence. The large green bars indicate the five minute time frame. The small green bars indicate the one minute time frame.