123 reversal setup is a basic on-chart formation, that warns about upcoming trend reversal.
Setup
The 123-chart pattern is a three-wave formation, where every move reaches a pivot point. This is where the name of the pattern comes from, the 1-2-3 pivot points.
Here is how the pattern looks like:
123 pattern works in both directions. In the first case, a bullish trend turns into a bearish one. And the second picture presents the opposite, a bearish trend turns into a bullish one.
The structure of 123 chart pattern
The pattern appears after three price movements, which form three pivot points and a confirmation level.
Pivot point 1.
This is a turning point that the price formed during the trend. If a price breaks the previous trendline after it formed pivot point 1, the pattern will be more reliable.
Pivot point 2.
The next turning point is very likely to form outside of the previous trendline or channel. This is a good indication that the trend might be ready to end and reverse.
Pivot point 3.
Pivot point 3 is crucial for 123 reversal chart patterns. The point must not exceed the pivot point 1 (in the worst case it might be on the same level) for the pattern to be valid.
The confirmation level is our entry point in the market. It is located at the same level as pivot point 2. When price breaks through this level open the trade.
Target level
To set the target trader needs to connect 1 and 3 pivot points with a line. The size of your 123 pattern equals the vertical distance between Line 2 (which is a horizontal line at the level of 2 pivot point) and the midpoint of Line 1.
123 chart pattern stop loss setup
It is highly important to use stop loss when trading the 123 chart pattern. The stop loss should be set under pivot point 3 in the bullish trend reversal, and above in the bearish one. In the condition of high market volatility, the price might get pushed beyond the 2 pivot point for a while. That’s why it will be a good idea to set stop-loss slightly beyond the 3 pivot point, as this will prevent stop loss from being activated.
Continuation 123 pattern setup
123 pattern also might work as a continuation pattern. In other words, it could give a signal that the trend is not going to reverse.
In this case, the price does not break the “confirmation level” at pivot point 2. On the contrary, it returns to the pivot point 3 level and breaks it through. This setup gives a signal that the trend will continue.
Stop-loss in continuation pattern formation
If you are trading the 123 pattern as a continuation formation, then your stop-loss order should go beyond Pivot Point 2.
The target level of 123 continuation pattern
The target of the “continuation 123 pattern” measures the same way as usual. The only exception is that in this case, you should take pivot point 3 as a starting one of your target.
Example
If you would only know about 1-2-3 patter in May 2021. That would be the greatest short trade ever! Let’s look at the perfect example of this pattern!
Daily Bitcoin chart
After the Bitcoin chart has formed 1 pivot point the price dropped behind the trend line, where the 2 pivot point occurred. Then the price bounced back and the 3 pivot point and a potential stop loss level appeared. After the price broke the confirmation level it dropped and reached the pattern target.
Conclusion
123 pattern is a common pattern that usually appears at the beginning of many price reversals. Sometimes, it might give a signal about trend continuation as well. To get higher quality signals it is better to use the 123 pattern in a tandem with an oscillator (for example RSI). At the moments of RSI extremes, 123 pattern will provide the most accurate signals.
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Author: FBS Analyst Team
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The 123 pattern reversal starts with the price swing not making the expected higher high (in an uptrend) or lower low (in a downtrend) and then breaking below or above a support or resistance level as the case may be. This change in price structure can help predict a potential reversal.
The classical approach to pattern 1-2-3 involves opening short positions at the break of the correctional low. The buyers who seriously expect the upward trend to be restored are most likely to have set their stop orders there. Their avalanche triggering allows you to see a sharp downward movement in the chart.
The 123-chart pattern is a three-wave formation, where every move reaches a pivot point. This is where the name of the pattern comes from, the 1-2-3 pivot points. 123 pattern works in both directions. In the first case, a bullish trend turns into a bearish one.
Traders look for this chart pattern on 1-day chart. For a 1-2-3-4 chart pattern to occur there must be at least 3 subsequent lower lows in parallel with at least 3 subsequent lower highs. A position is bought when the market price trades above the high of the last candlestick in the pattern.
If you ever don't feel like doing something, use the 123 method. In this method, you must get up no matter what and slowly count to 3.During this countdown, once you say 3 you must get out of your bed immediately and activate the flow.
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When the pattern is discovered, the 1-2-3 Pattern (Expo) Indicator notifies you via its built-in alert feature! Catching the upcoming big move can't be that much simpler. The 1-2-3 pattern is used to spot trend reversals. The pattern indicates that a trend is coming to an end and a new one is forming.
Trading the 123 pattern involves entry at the breakout of point 2, stop loss placement below (for bullish setup) or above (for bearish setup) point 3, and setting a profit target by measuring the pattern itself. How can I estimate the profit target for the 123 pattern?
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).
The trendline connecting the two does not cross prices until after the highest high, point B. Point 1 is the trendline break. Point 2 is the retest, and 3 is a close below the lowest low between points 1 and 2. Point 3 is where price changes trend.
The 123 setup consists of three pivot points. The confirmation of the 123 reversal pattern lays at Pivot Point 2. The target when trading a 123 formation is at a distance equal to the size of the pattern, applied beyond Pivot Point 2. Your stop loss should go beyond Pivot Point 3.
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