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 observe there is actually nothing complicated relating to this price pattern and also the 1 two 3 reversal is merely a breakout associated with highs or even lows following an impulse/corrective relocate price.
Breakouts fall short so the most crucial aspect from the 1 two 3 change pattern is actually what cost does upon and directly following the breakout. You need to see cost acceptance from the new higher. Of program there are frequently a pullback following the breakout (Ross Hook), but that doesn’t make this particular price pattern broken.
In truth, the pullback following the breakout could be a way to increase your placement.
This can be a high degree overview even though you might find this sufficient to trade, others will appear for additional variables to fall into line.
What’s vital that you notice is how the #3 stage also gets the #1 point since the first pattern solves. A break from the green filled line will be your trading admittance.
You can easily see at the final pattern really clearly – a cost pullback doesn’t make this particular trade broken
Rule Base The 1 2 3 Reversal Setup
You can easily see whatever you want on the chart. Our eyes like to see designs where these people don’t truly exist.
One technique you might want to use to find out if the actual potential 1 two 3 setups you are considering is the possible trade, is by using a Fibonacci retracement area.
There isn’t any magic within Fibs therefore don’t think that this is actually the most essential requirement of this particular reversal pattern. What it may do is ensure that you are seeing a genuine pattern which has a real retracement instead of a easy consolidation pattern.
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
Among the easiest ways would be to just trade the actual breakout from the pattern. I haven’t done any kind of back testing onto it but We don’t observe how that might be an edge particularly if you think that most outbreaks will fall short. Maybe these people won’t simply fail, but we’ve observed quick jumps above/below #2 that may trigger you to the trade that all traders likely have experienced.
Another method to enter would be to monitor price since it approaches golf swing #2. See if you’re able to find some form of consolidation in your trading time period or perhaps a lower time period. This may position you prior to the breakout and when the breakout works with impetus, you will discover yourself within quick earnings.
Stop Loss Location
You should use somewhere beneath or over the #3 or even use a good ATR cease that steps the volatility from the market. Just ensure you aren’t placing your own stop loss too near to market motion. The primary drawback from the 1 two 3 pattern is actually that stops could be fairly large with respect to the length from the 2-3 lower-leg.
Traders might, once these people recognize the actual pattern on the higher time period, drop to some lower time period to check out the exact same pattern on the smaller size.
You can get an previously entry along with a smaller danger profile too. You should think about using exactly the same stop location while you would about the higher time period chart. By having an earlier entry from the lower time period 1 two 3 change, you may have an chance of a somewhat larger placement 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.
As soon as price removes #1, you leave the trade whatever the profits you’ve accumulated. Traders might notice this can be a violation associated with higher levels and greater lows you’ll need for a good uptrend. That’s correct. You exit whenever you see price isn’t any longer improving the step stepping trend path pattern.
Another profit taking approach is to use Fibonacci extensions.
Managing Your Trade
Being a risk manager is my first job.
- 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%.
- 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.
- 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!