How to Find Reversal Points with the 1-2-3 Price Pattern Method.

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What is the 1-2-3 Price Pattern Method?

The 1-2-3 Price Pattern Method is a price pattern for trading trend reversals. It is a trading pattern based on pure price action.

The 1-2-3 price pattern has three key pivot points from which its name is derived, 1, 2, and 3.

In this method of trading, price forms a significant swing after trending in a particular direction, which you should name 1.

It then retraces to the opposite direction of the initial trend and not far from the formed swing, creating an opposite swing which you should name 2.

The price then resumes the direction of the initial trend and before it breaks out of the initial swing which you named 1, it reverses in a direction opposite the initial trend, forming a swing which you should name 3.

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The act of the price breaking out of the level of the swing you named 2 means a successful reversal of the initial trend.

123 pattern - Buy on Break of resistance

The 1-2-3 Price Pattern Setups.

Onto how the 1-2-3 price pattern setups look like.

They are simple to trade setups you can spot at a glance and equally easy to trade. Here are the specifications for each tradable direction.

  • Bullish Reversal Setup: The price on a downtrend forms a trough named 1 by retracing upwards.

The price then peaks, not far from the trough. This peak is named 2.

The price then falls and rises again to form another trough which is not lower than the level of the trough named 1 and this second trough is named 3.

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If the price breaks above the level of the peak named 2, then the downtrend is meant to reverse upwards successfully.

  • Bearish Reversal Setup: The price on an uptrend forms a peak named 1 by retracing downwards.

The price then bottoms, not far from the peak. This trough is named 2.

The price then rises and falls again to form another peak which is not higher than the level of the peak named 1 and this second peak is named 3.

If the price breaks below the level of the trough named 2, then the uptrend is meant to reverse downwards successfully.

Also Read: – HOW TO MAKE UP TO $300 A DAY WITH THE LINEAR REGRESSION TRADING STRATEGY.

Simple, right.

If you are wondering how to catch price reversals using the pattern, continue reading.

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In this post, I will show you exactly how you can find price or trend reversal points with the 1-2-3 price pattern method.

Don’t begin to think that what you have learned in the introduction is enough, because there is more than meets the eye.

Let’s dive right in, shall we?

Bullish 1,2,3 Reversal Pattern Explained

Finding Reversal Points with the 1-2-3 Price Pattern Method.

Are you scared that I told you not to think the introduction was enough?

Don’t be scared because this section comes with all the dynamics and a step-by-step approach to this trading pattern.

By the end of this guide, I promise, you will be profitable with this pattern.

Come to think of it, the 1,2,3 price pattern method is the simplest and easiest pattern I have discussed in this blog so far.

Here are the simple steps to finding trend or price reversal points with the 1-2-3 price pattern method:

  1. Establish the Market Trend.

To trade the 1-2-3 reversal pattern, you need a market trend that will be reversed by the pattern.

That is why the first-ever step is establishing a market trend.

So in what kinds of trend does the 1-2-3 reversal price pattern work best?

The pattern method works best in market trends that are either upwards or downwards and not sideways.

In an upwards market trend, the price forms higher highs and higher lows.

On the flip side, in a downwards market trend, the price forms lower highs and lower lows.

Once you establish either trend, then you are good to proceed to the next step.

Market continues to form higher highs and higher lows

  1. Draw a Major Trend Line.

Have you established whether the market is trending upwards or downwards?

If you have, then you can proceed with this step.

This step deals with something we never covered in the introduction.

So what happens here?

If your market is trending upwards by forming higher highs and higher lows, draw a trend line connecting the major lows of the market.

You will get an upward sloping trend line which will serve as the major bull trend line.

If your market is trending downwards by forming lower highs and lower lows, however, draw a trend line connecting the major highs of the market.

You will get a downwards sloping trend line which will serve as the major bear trend line.

Once you have drawn the major trend line, then scanning for trading signals begins.

You can begin looking for swings 1, 2, and 3 in order to trade the pattern.

Down Trend on 1,2,3 pattern

  1. Spot Swings 1, 2, and 3.

It is time to find trend reversal points using the 1-2-3 price pattern method.

The 1-2-3 price pattern is a trend reversal pattern and so we shall proceed to see how to spot a bullish reversal and a bearish reversal using the pattern.

Bullish Reversal.

Here is how to find bullish reversal points using the 1-2-3 price pattern method on a downwards trending market:

Swing 1.

The first swing must occur in such a way that the falling price forms a swing low and retraces upwards, breaking above the major bear trend line.

Note that the price breaking above the major bear trend line must occur, to hint at a serious reversal of the downtrend.

Swing 2.

The second swing must occur such that the retracing price from swing 1, above the major bear trend line, ends its retracement and starts falling again.

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This swing should not occur far away from swing 1.

Swing 3.

The third swing must occur such that the falling price after an upward retracement, begins rising again, having bottomed above the level of swing 1.

If it bottoms below the level of swing 1, then that bullish reversal 1-2-3 price pattern is distorted.

It is also advisable that swing 3 does not form below the major bear trend line.

If you spot all the 3 pivot points which meet all the specified criteria, then you have just spotted a bullish reversal point on a downtrend.

If the price breaks above the level of swing 2, it is meant to rally upwards, successfully reversing the downtrend.

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Bullish 1,2,3 Reversal Pattern Explained

Bearish Reversal.

Here is how to find bearish reversal points using the 1-2-3 price pattern method on an upwards trending market:

Swing 1.

The first swing must occur in such a way that the rising price forms a swing high and retraces downwards, breaking below the major bull trend line.

Note that the price breaking below the major bull trend line must occur, to hint at a serious reversal of the uptrend.

Swing 2.

The second swing must occur such that the retracing price from swing 1, below the major bull trend line, ends its retracement and starts rising again.

This swing should not occur far away from swing 1.

Swing 3.

The third swing must occur such that the rising price after downward retracement begins falling again, having peaked below the level of swing 1.

If it peaks above the level of swing 1, then that bearish reversal 1-2-3 price pattern is distorted.

It is also advisable that swing 3 does not form above the major bull trend line.

If you spot all the 3 pivot points which meet all the specified criteria, then you have just spotted a bearish reversal point on an uptrend.

If the price breaks below the level of swing 2, it is meant to rally downwards, successfully reversing the uptrend.

  1. Set Up Buy Stop or Sell Stop Pending Order.

Did you establish a bullish reversal point on a downtrend?

Then set up a buy stop pending order at the highest level of swing 2.

The order will activate immediately the price breaks above that highest level of swing 2.

Did you, on the other hand, establish a bearish reversal point on an uptrend? 

Then set up a sell stop pending order at the lowest level of swing 2.

The order will activate immediately the price breaks below that lowest level of swing 2.

  1. Adjust Stop Loss and Take Profit.

This pattern uses pivot 3 as the Stop Loss level.

For the buy order, place your Stop Loss at the lowest level of swing 3.

Place your Stop Loss for the sell order at the highest level of swing 3.

Because this pattern aims to catch an emerging trend at the very early stage, a Trailing Stop Loss works best.

It will ensure you lock in profit as the new trend grows.

You are then meant to profit from the better part of the trend move.

Final Thoughts.

Beware of spoilers, by which I mean other trade setups apart from the 1-2-3 pattern, which might coincide with the pattern, having opposite implications to the 1-2-3 pattern you identify.

It is advisable that you don’t trade the 1-2-3 price pattern method in isolation.

Instead, you can combine it with other trading tools such as oscillators to make use of their divergences as well as with chart patterns.

Tighter Stop Loss orders are also advisable, depending on what else you combine the 1-2-3 price pattern method with.

That is because the price has already shown a determination to reverse.

Happy Trading!


*Risk warning:

The information provided does not constitute a recommendation to carry out transactions. When using this information, you are solely responsible for your decisions and assume all risks associated with the financial result of such transactions.
 

Start Trading 

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