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The most basic and essential formation in the market is the 1-2-3 pattern. Almost every great move ever made in the market starts from this formation. 1-2-3 pattern initiates trends, establishes them, and occurs at significant highs and lows in the market. Every trader has used this pattern to detect a trend change without knowing they are using the 1-2-3 formation.
This article will explain what a 1-2-3 pattern means and how to identify and take advantage of the pattern. In addition, we will shed light on ourFree 1-2-3 Pattern (Expo)indicator that identifies the formation automatically and in real-time for you.
Introduction
The trend is your friend, so trade with it. This obvious fact is written in every book on technical analysis. However, all traders determined the trend differently, but there are some everyday patterns that most traders use. For example, the 1-2-3 Reversal Pattern is one of the most common ways of identifying trend changes and reading the trend direction. The 1-2-3 trend formation is so popular because it uses price actions. Hence all traders can identify it in any market and timeframe. However, although it’s the most common way, many traders have never heard of the 1-2-3 pattern. So, to simplify retailers’ trading, we at Zeiierman Trading decided to create the indicator1-2-3 Pattern (Expo).
Identify the 1-2-3 Reversal Pattern
A new trend emerges from one or more countertrend patterns. Therefore, it’s super essential for traders to be able to identify these countertrend formations. One is called the “1-2-3 Pattern.”
Bullish 1-2-3 pattern also called 1-2-3 low
A 1-2-3 low is characterized by a market reaching a significant low (number 1). The low is set once the price makes a major move away from the low (number 2). A correction immediately follows this as the market moves back toward the significant low and creates a higher low (number 3). If the price continues up from this point and breaks the high (number 2), the reversal pattern is confirmed, and a new bullish trend is likely to be established.
Bearish 1-2-3 pattern also called 1-2-3 high
A 1-2-3 high is the exact opposite of a 1-2-3 low. When there are no more buyers in the market, the price has a hard time making a new high. The bulls are sensing that the upward move is over. They begin to liquidate their long positions and take profits. A significant high is created (number 1). The bears are looking for a short opportunity that pushes down the price even further. The price makes a move away from the high (number 2) is created. This is followed by a retracement back up toward the significant high, and a lower high is made (number 3). If the price continues down from this point and breaks the low (number 3), the reversal pattern is confirmed, and a new bearish trend is likely to be established.
Same pattern, different name
The formation is also identified as a failure to break a new high or low. Some traders might recognize the 1-2-3 pattern as a Higher high going to a Higher low followed by a Lower high, also called HH/HL/LH. This is a sign that the trend might change toward negative. Conversely, identifying a bullish trend, traders are looking for a Lower low to a Lower high followed by a Higher low (LL/LH/HL).
How to use
The 1-2-3 pattern is used to identify and find trend reversals. The pattern shows that a significant trend is coming to an end, and a new one has formed.
Bullish Entry
The traditional way to enter a trade with the 1-2-3 low is to enter a long position when the price breaks above the correction high (point 2). Then, stop loss is set slightly below the lower high (point 3).
Bearish Entry
The traditional way to enter a trade with the 1-2-3 high is to enter a short position when the price breaks below the correction low (point 2). Then, the stop loss is set slightly above the lower high (point 3).
Stoploss placement
Since the 1-2-3 pattern is a trend reversal, we expect a new trend to be established. To clarify, if the current market trend is bullish and a 1-2-3 pattern is formed, we expect the trend to reverse bearish. Hence we want the price to go down and not break up for a higher high. Therefore the stop loss placement would be slightly above point 3.
Target & Exit
We recommend using a profit factor of two or higher to have proper risk management. Since this is a trend strategy, we assume a great move. Therefore we should take that into account when determining our target.
Previous levels of support/resistance can be excellent areas for taking partials profit or exiting your trade. If you want to ride the trend until it ends, you can set trailing stops to follow the price. We have developed take-profit indicators that help traders identify great areas to take a profit.
How to use the 1-2-3 Reversal Pattern (Expo) Indicator
The indicator makes it easy for traders to find the 1-2-3 Reversal Pattern automatically. The 1-2-3 Reversal Pattern (Expo) Indicator analyses the price action data for you and displays the pattern in real time.With the inbuilt alert feature, the 1-2-3 Reversal Pattern (Expo) Indicator sends a notification when the pattern has been found!It can’t be much easier to catch the next big move.
Indicator Features
- Select the pivot period that identifies highs and lows. A low-value returns short-term price moves. A high value returns long-term price moves.
- Set shapes and colors for the 1-2-3 reversal formation.
- Display HH/HL/LL/LH pivots points.
- The user can also set alerts and get notified when the pattern is confirmed.
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