1-2-3 trading pattern guide (2024)

What is the 1-2-3 Pattern?

The 1-2-3 Chart Pattern is a sequence that appears on a chart of any asset, whether it’s a commodity, a derivative, a stock, or anything else. Once completed, it indicates the end of the current major forex trend and the start of the inverse trend. In other words, this pattern predicts future price movements and alerts traders of the potential reversal.

At first sight, there is nothing special that signals the formation of this forex pattern. But only experience or sharpness could help traders detect the pattern. It’s 3 waves- pattern formation. A 3 pivot points where price consolidates between highs and lows. The point’s position defers on whether the pattern is bullish or Bearish. But one thing is certain, once the pattern has completely formed, it reflects the overall market sentiment. In other words, whether the Bulls or Bears are in control of the market.

Example of completed 1-2-3 Pattern

The pattern is considered complete only when the familiar sequence is broken, which means that the consolidation ends when the price breaks the confirmation line. In addition, note that there must be a minimum number of candles between each pivot point, at least 3.

On the other hand, the 1-2-3 Pattern may work as a continuation pattern as we stated earlier. Meaning that if the price does not break the confirmation line, it’s probably a sign that the current trend we continue further and that it won’t reverse. Thus, a stop loss order would be helpful. The formation of the pattern defers on whether it’s a bullish 1-2-3 pattern or a Bearish 1-2-3 Pattern.

Bullish 1-2-3 Pattern example

The Bullish 1-2-3 Pattern forms after a long downtrend, typically a sharp one. The forex price is continuously dropping until it reaches the 1st pivot point where things may start to change.

• P-Point 1:

This point is the start of the pattern, where the price has reached a new low and bulls are gathering to take over the market. The way to detect this point is to draw a support trend line. Note that if the line is not drawn correctly, it could mislead traders and make them miss some interesting opportunities. However, the 2nd pivot point will determine the accuracy of the 1st In other words, if the 2nd point appears, this means that the trader has successfully detected the 1st pivot point.

• P-Point 2:

This is the second point where the price typically goes up a little bit. The price hits the resistance level and bounces back. Sometimes it may occur at the same level as the previous high and sometimes lower. In both cases, the appearance of the 2nd pivot point allows traders to set up a confirmation line that they are going to use later when the 3rd pivot point appears.

• P-Point 3:

The last pivot point of the pattern. During the transition between the 2nd and the 3rd point, prices tend to fall sharply. Yet, the lowest price of the transition is still higher than the lowest price that appeared in the 1st This conditional fall confirms the establishment of the 3rd point. Furthermore, once this last point appears, the pattern is complete at 90% and is still waiting for confirmation from the “Trend Reversal Confirmation Line”. In addition, for the pattern to be confirmed, the 3rd pivot point must be followed by a high spread increase in price.

• Reversal Confirmation Line:

It’s a line that is drawn when the 2nd pivot point appears, this line represents the resistance line that shall be broken through by the sharp increase in price that occurs after the appearance of the 3rd pivot point. Once this line is broken, the pattern is confirmed and the uptrend has officially started. However, if the trend reversal line wasn’t broken through and the price has bounced, this will be interpreted as a continuation pattern and the downtrend will likely continue. Thus, it is advised to put a stop-loss order to avoid any catastrophic forex traders losses.

Bearish 1-2-3 Pattern example

The Bearish 1-2-3 Pattern forms after a long uptrend, typically a towering one. The price is continuously rising until it reaches the 1st pivot point where things may start to change.

• P-Point 1:

This point is the start of the pattern, where the price has reached a new high and bears are gathering to take over the market. The way to detect this point is to draw a resistance trend line. Note that if the line is not drawn correctly, it could mislead forex traders and make them miss some interesting opportunities. However, the 2nd pivot point will determine the accuracy of the 1st point. In other words, if the 2nd point appears, this means that the trader has successfully detected the 1st pivot point.

• P-Point 2:

This is the second point where price typically falls a little bit. The price hits the support level and bounces back. Sometimes it may occur at the same level as the previous low and sometimes higher. In both cases, the appearance of the 2nd pivot point allows traders to set up a confirmation line that they are going to use later when the 3rd pivot point appears.

• P-Point 3:

The last pivot point of the pattern. During the transition between the 2nd and the 3rd point, prices tend to rise. Yet, the highest price of the transition is still lower than the highest price that appeared in the 1st point. This conditional rise confirms the establishment of the 3rd point. Furthermore, once this last point appears, the pattern is complete at 90% and is still waiting for confirmation from the “Trend Reversal Confirmation Line”.

• Reversal Confirmation Line:

This line that is drawn when the 2nd pivot point appears, this line represents the support line that shall be broken through by the decrease in price that occurs after the appearance of the 3rd pivot point. Once this line is broken, the pattern is confirmed and the downtrend has officially started. However, if the trend reversal line wasn’t broken through and the price has bounced, this will be interpreted as a continuation pattern and the uptrend will likely continue.

How to trade with it ?

Doesn’t matter if you trade on a 5 minutes timeframe, 1 day, or even 1 week. The pattern still appears and the interpretation is the same. However, the pattern forex strategy differ on whether you are aiming at an uptrend or a downtrend.

Yet, it is advised to aim at a highly volatile asset, so the profit may be important.

In other words, whether you are a short-position trader or a long-position.

Trading while a Bearish Trend starts

During a Bearish trend, only short position traders may benefit from the 1-2-3 Pattern. This profit is due to the large forex spread between the selling price and the buying orders price. Furthermore, those who try to outsmart the market tend to lose a lot of money. Some traders may enter a short position when the 2nd pivot point appears, which is wrong and extremely risky. Because as we stated earlier, the 1-2-3 pattern could be a reversal pattern and could also be a continuation pattern. Thus, you should enter a short position only when the 3 pivot points form and the price break through the “Trend reversal confirmation line”. In other words, when the pattern is confirmed.

Trading while a Bullish Trend starts

The good thing about trading in a bullish trend using the 1-2-3 pattern is that you can enter a long position or speculate.

• Long Position Traders: This is an easy way for those who are planning to buy the asset and keep it for a long time as they believe that the asset is undervalued or that its value may significantly increase over time. There is only one step for those traders: enter the long position only when the pattern is confirmed, so you may lock in the highest possible profit resulting in the wide spread between the bid and ask price.
• Speculators: Things may get a little bit complicated for speculators. The 1st thing they may want to do is to switch on a short timeframe. Preferably 15 min or a little bit higher (no more than 1 day). Then, they would have a problem that they may want to fix. We all know that speculators benefit from the small spread between the bid and ask prices. But, if they wait for the pattern confirmation, they may miss some important opportunities. Thus, it is advised to wait for the 3rd pivot point to form then use a technical indicator. Preferably a trend-following indicator.

Conclusion

• The 1-2-3 Pattern is a trend reversal pattern, however, in some cases, it may indicate the continuation of the current trend if some points are met.
• The pattern could be bearish or bullish and each one has unique characteristics.
• The pivot point pattern is built using 3 pivot points and a confirmation line.
• A bearish pattern appears at the end of an uptrend while a bullish pattern appears at the end of a downtrend.
• If the confirmation line gets broken though, it’s an indication of a potential trend reversal, else a continuation pattern.