Don’t let the title fool you.We’re not doing a countdown here. We’re going to learn how to trade a very popular and simple trading strategy called 123. It’s as simple as 123 if you ask me. The 123 pattern is a pattern that help s you exploit the prevailing trend. It’s a pattern comprising of three trade setups which occurs in both the uptrend and downtrend,However,the 123 pattern can also alert you of potential price congestion(consolidation) or trend reversal,depending on the forex pair you’re trading of course.
So what’re we going to do?We’re going to do s do. what we alway.We’ll first find out what the 123 strategy is all about, we’ll then break down the pattern for easy understanding, and,to put the icing on the cake, we’ll delve in to how to trade 123 strategy.
But first things first:
What On Earth is the 123 Strategy?
Well the 123 strategy is a very popular reversal formation traded by most forex traders.123’s usually take shape. at the end of trends and they also signal the end of a prevailing trend. You can also catch a a 123 in a ranging market or sideways market. Let’s take a look at a 123 pattern in an uptrend.
As you can see the candlesticks are conveniently labeled 123 to reflect the up and down nature of the pattern. Point 1 is the lowest point and acts as the support. Why?because the uptrend starts from the bottom. Point 2 is the highest peak of the trend and forms a resistance level to any bullish onslaught. Point 3 represents another support level or the second low point. The breakout point above point 2 represents the continuation of the bulls upward surge.
If you’re not sure about support.resistance levelsand breakouts, read up on Identify Support and Resistance Levels With Price Action Analysis and Break Out Trading Breakouts.
Now let’s look at how 123 shapes up in the downtrend
As you can see the 123’s behave differently in the downtrend. Point 1 is the highest peak when price runs into a brick wall called resistance and the bears take over the show. Point 2 is the low point or forms a support level. Point three takes shape when price moves up and puts up a resistance barrier.Take a close look at the price break out below point 2. When the breakout happens, it means the bears will continue their slalom run.
Now that we’ve broken down the formation, Let’s take a look at the:
We’re going to take a look at a conservative trading plan for the 123 strategy for some of us who need a little extra confirmation in our trades. However, we do not want to take too long enter our trades, since we may end up having to make up for a huge loss. And by the way,all the horizontal lines that you see on the screen represent the lines of support and resistance in all three trade setups. So here we go:
Trade Setup 1 for 123
I hope your vision is as sharp as mine.Because if it is, you’d notice that price surged from point 3, but run into the brick wall popularly called resistance at point 2 and pulled back or retraced.As a consequence of this pullback, a double bottom pattern is formed.
This suggests the bulls are losing stamina. To be certain it’s a double pattern you’re looking at, make sure price has broken through the point 2 resistance level like it’s nobody’s business. Jump in prematurely, and your trading account will blow up in smithereens.If you want to know what a double bottom pattern is all about and other price action patterns, look up Trading Forex Chart Patterns Part I and Trading Forex Chart Patterns Part II.
How Do I Trade?
Get your trade in once price breaks out Point 2. Next place your entry at the close of the daily candle to confirm a solid breakout. You can also put in a buy order just above the candlestick that broke through Point 2. To protect your account from any unpleasant surprises place an Average Truth Range Stop(ATR) at the candlestick just before the breakout candlestick. Wanna know what the Average Truth Range is? Look it up on my post Break Out Trading Breakouts.
Let’s now take a look at:
Trade Set Up 2 For 123
Notice how the bulls go on a tear at point one and the bears take over at the support level at Point 2. This of course creates a strong reversal , causing price to retrace or pull back inside the previous sideways pattern or consolidation from Point 1. And as you can see, price represented by the bulls has picked up strength at Point 2.
How Do I Trade?
Make your entry once the price, represented by the bulls break through Point 2. Ma your entry at the close of the candlestick, Next put an ATR stop in the middle of the candlestick just before the breakout candlestick. If you get it right,you should see the cash flowing nicely.
Which finally brings us to :
Trade Setup 3
Now this setup goes against the grain of a typical 123 pattern. Instead of a defined trend, you have a nasty looking consolidated market or sideways market at Point 3. You can see the bulls have started losing steam after a period of domination. Consequently, it has resulted in a stalemate with neither the bulls nor the bears establishing a clear advantage. Notice the way the bulls break through the support at Point 2 but then fall into the consolidation trap. This exemplifies the loss of steam that I was referring to.
Oddly enough, this current stalemate creates trading opportunities. Make sure the coast is absolutely clear before you make your entries or else your account could suffer a Deontay Wilder-style knockout.
Which finally brings us to:
How Do I Trade?
To make your entry, you can do that a few ways.You can use a multiple time frame approach and settle on a lower time frame . Or you can get comfortable at highs and lows of breakout candlesticks. By that I mean, breaks of support levels and resistance levels.
Now some of you are wondering out loud”Where Do I Take The Profits?” Well, you can do it two ways. You can add specific targets in support or resistance levels , depending on the trend prevailing at the time. Or you can use your trailing stop as means of raking up as much profits as they are available on the market. You should be smiling all the way to the bank with this one.
If you wanna know what a trailing stop is and other market orders, Read up on Forex Trading Basics – Top to Bottom Part II.
That’s a wrap for “Trade 123 Strategy – Simple as 123”. The 123 strategy is a very powerful continuation price action strategy for making profits. All you’re doing is taking advantage of the prevailing trend at the time. It can also alert you of incoming price consolidation also depending on the currency pair you are trading.
Til next time take care.
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