The 1-2-3 reversal pattern is utilized in Forex, stock, and futures trading. This strategy has income potential. Traders utilize it to pinpoint entry and exit positions.
This general-purpose formation strategy may be used over lengthy periods and all currency pairs. ForexGame tournaments let you test the 1-2-3 reversal pattern. See the strategy’s essential parts below.
The 1-2-3 pattern trades market reversals. After a currency pair has had a sustained advance in a certain trend, a market reversal is predicted, generally due to profit taking or traders driving prices in the other direction.
The 1-2-3 reversal technique focuses on identifying the pattern and trading it.
How can a trader spot a reversal?
How can you profit from this reversal?
The 1-2-3 reversal approach answers these questions.
1-2-3 Reversal Pattern Identification
First, recognize the 1-2-3 reversal pattern. Reading charts helps spot this tendency. Most Forex platforms feature charting packages. For pattern analysis and identification, utilize MetaTrader 4 charts.
How do you recognize 1-2-3? Open a 4-hour or daily chart to analyze price changes. Long-term charts better depict the market trend.
Hourly charts only show intra-day price fluctuations, which is market noise.
On short-term charts, a trend reversal may merely be a temporary pullback. To trade a real market reversal, we must use long-term charts.
The 1-2-3 reversal approach may be traded as an uptrend or downtrend reversal because the market is bi-directional.
If a trader wants to trade 1-2-3 as an uptrend reversal, they should short. This image shows chart price fluctuation. The uptrend will peak at point 1, then price would reverse downward to point 2. From point 2, price is predicted to rise to the 38.2% or 50% retracement of a line drawn from point 1 to point 2, finally ending at a lower-than-point-1 resistance level denoted point 3. From point 3, price should reverse and break point 2’s support line.
For the 1-2-3 reversal trade following a downtrend, price movement is predicted to bottom at point 1, then briefly push higher to point 2. From point 2, price movement moves lower and halts at 38.2% or 50% retracement region of a line created from point 1 to 2, finally ending at a higher-than-point-1 support level, point 3. From point 3, price should reverse higher and break point 2 resistance. Example:
1-2-3 Forex Reversal Strategy: Long trade
Identifying the 1-2-3 reversal setup needs these points:
To connect points 1 and 2, use a trend line tool.
Fibonacci retracement identifies the 38.2% or 50% retracement of a line from point 1 to 2, which is lower than point 1 in an uptrend and higher than point 1 in a downtrend.
Point 3 retraces.
Understanding retracement helps traders choose where to enter reversal trades.
Once the pattern is identified, the trader can use the approach. The trading strategy’s key points are:
Trading entry points
When to sell.
After the rally ends, short the 1-2-3 pattern for a bearish reversal. Ensure the 1-2-3 pattern has formed before trading.
Allow the 1-2-3 pattern to emerge, then trade at the break of the support line at point 2.
Forex 1-2-3 reversal strategy: short on line break
View the picture. Point 3 is the 50% retracement level of lines 1-2, and the short trade is made upon line 2’s break. When a candle closes below line 2 support, the break occurs. Stop Loss is above the broken support, and Take Profit is two times the stop loss distance.
Form points 1,2 and 3 as shown. Mark point 2 resistance horizontally. Long when price breaks resistance.
Breaking resistance indicates the candle has closed above the line. If the candle closes above this line, wait for a pullback to the broken resistance and go long.
After the candle closes above resistance, a Buy Limit order can be placed.
Forex 1-2-3 reversal strategy: long on line break
Stop Loss is below the broken resistance, and Take Profit is at least twice the stop loss distance.
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