1-2-3 system strategy

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Learn The Powerful 123 Forex Trading Strategy

The 123 Forex trading strategy is based on price action and normal Forex market structure that any trader should know. The 1 2 3 trading strategy is used as a continuation trading setup that is designed to take advantage of the trend of the market.

The failure of the 123 trading strategy is also a trade setup but can also warn you of potential price consolidation in the market or even a trend reversal in whatever Forex pair you are watching.

Keep in mind that even though it is a continuation pattern upon confirmation, it is also a reversal pattern from the short term trend direction.

1 2 3 Trading Pattern Formation

In any trending market, there is a pattern of higher highs and higher lows. In order for the trend to the upside to remain active, each successive impulse swing must take out the point 2 in the formation. When price surpasses the price at #2, the trader can use that as confirmation that the 1 2 3 chart pattern is present.

This is a line chart that explains the concept of the 1 2 3 trading pattern and in this case, we are assuming an up trending market

1 2 3 Trading Strategy

Let’s walk through each number and this pattern should be familiar to any trader who’s been looking at charts for a while.

  1. When an uptrend pulls back, it will put in a low and from that low, price continues to rally.
  2. This acts as short term potential resistance. Price rallies to this point and then begins to retrace back in the direction of the price at #1. We DO NOT want to see price retrace all the way to the price at #1. If it does, we will consider that to be the formation of a double bottom chart pattern and would trade that according to the trading plan you have set up for that price pattern.
  3. This level is also considered a #1 only when the price level at #2 is broken. This price point is the level at which the corrective move completes and the price reversal to the upside begins.

Please note that the 1 2 3 price pattern is only confirmed once the high at point #2 is taken out by price.

You can also see that the 1 2 3 trading strategy is taking advantage of the stair step nature of the market that is needed if a trend is going to continue. It is at the confirmation of the patter that a trader can place a conservative trading position in the market.

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1 2 3 Chart Pattern By The Numbers

In an uptrend market situation, price will make 3 points

  • Point 1 is the lowest low point, forms a support level.
  • Point 2 will be the peak or the highest point, forms a level that we consider as potential resistance
  • Point 3 will be the 2nd low point, a support level ( which must be higher that the point 1 which is the lowest low point ).
  • The breakout of price above point 2 signals the continuation of the uptrend.

In a downtrend market, the 1 2 3 chart pattern forms when:

  • Point 1 becomes the highest peak when price finds resistance and moves down.
  • Point 2 becomes the lowest low point (forms support) and price moves up
  • Finds another resistance at point 3.
  • when price breaks the point 2 support level,it indicates that the market is most likely to continue downward

Trading Strategy Trading Plan

Let’s take a look at a potential trading method to trade the 1 2 3 trading strategy. We will look at a conservative method for those traders that need a little extra confirmation in their trades.

Keep in mind there is a cost involved. The longer you wait to get involved in a trading position, the larger you will have to make your stop loss.

123 Trading Plan

Trade Setup 1

You should be familiar with the numbers and what they represent on the chart. We can see that price rallied from point 3, found resistance at point 2 and retraced. We now have a double bottom chart pattern and just as the 1 2 3 trading strategy needs a breach of #2 to confirm the pattern, so does the double bottom.

If you do get a double bottom after a move in price, that could signify weakness in the market. If bulls were fully in chart during the retrace at 2, we should not see two shots at the level #3.

Price breaks above #2 and you can either enter at the breakout or, my preference, take a position at the close of the candlestick to confirm a true break. You can also put an order to buy slightly above the candlestick that broke the #2 level.

Your stop loss should be below #2 with buffer room to allow for noise. You can also, my preference is coming, use a 14 period Average True Range x 2.

Trade Setup 2

Price rallies from #1 and gives us a strong reversal candlestick at #2. Once price begins to retrace, put this currency pair on your radar. Price find support at #2 (inside the previous consolidation pattern from trade #1) and shows strength as it rallied to #2.

Once price shatters the #2 price zone, enter at the close of the daily candlestick (or whatever time frame you are using) and use an ATR stop. The average true range stop for this trade would actually be in the middle of the candlestick that printed just before the breakout candlestick.

Trade Setup 3

Each trader should understand this pattern by now so let’s focus on the range that is occurring. We have most variables need for the 1 2 3 trading strategy but price is forming a range near the level at #3.

That is NOT something we want to see for a clean 1 2 3 chart pattern.

When price is basing in this fashion, it shows that the side that was dominant, in this case bulls, have tired. As a trader for years, I have seen the following occur:

  1. Price trends nicely
  2. Weakness shows up in this fashion
  3. Traders will take another run to the upside, break #2 and then see this fail back inside

This formation of the consolidation is also a great trade entry into the potential of the 1 2 3 chart pattern continuing.

We can position early in the 1 2 3 formation when we have basing occurring. Ideally, we would like to see some form of basing near the resistance level (red line). You can see the green dashed line and then price rockets to resistance.

That is not conducive to a sustained break of resistance.

The more favorable setup is to have either basing near the extreme or a slight pullback in price which we see with orange box. The break out then occurs after that pullback.

Those types of breaks are more effective and see if you can understand why. Some would think the first break would carry more weight because the drive started midway in the range.

But traders who positioned lower will also look for scalping Forex trades at the top of the range – is that not how you play a range?? Yes. The breakout that occurs is driven by traders who went long at the bottom of the range.

Let’s see some detail in this chart

  1. Price could not rally far from the low which is showing the 1 2 3 chart pattern – the stair stepping in a trend – is under attack. Price can’t break lows so traders go into range trading mode
  2. The formation of this smaller range allows traders to position with a tighter stop loss just under the small range.
  3. You can see there was a drive to this level and then a very weak candlestick shows up. This is either traders positioning short in the range or the longs taking profits.

That is the type of thinking you want to have as a trader. Do not trade blind!

What Is Your Entry Strategy?

As discussed, you can enter at the close of the break out candlestick (signal candlestick) or entering your trading position at a break of the high.

Some traders may want to use a multiple time frame approach and enter on a lower time frame. In my own trading and in my years as a trader, I look to simplify. Entering at close or breaks of support levels or resistance levels (highs and lows of breakout candlesticks) is my favored entry

Taking Your Profits

Some traders would like to see specific price targets to add to their trading plan. Other traders see the power of trailing their stop loss to take as much as the market is willing to give.

You can use structure targets such as higher resistance levels in an uptrend.

You can use legs 1-2=3-4 which suits the 1 2 3 trading strategy.

One to One Targets

I color coded each swing so you can see where I am measuring from. I use the 3 point Fibonacci tool and set it to the 100%. You can see the first two trades nailed the targets. The third trade hits the .618 Fibonacci level which is quite popular when used to portion out swing points.

Summary

The 1 2 3 trading strategy is a pure price action trading method that uses a sound approach to trading.

No trading indicators are required although I do suggest the ATR for stop loss placement.

You must have a proper risk protocol as part of your trading plan.

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The 1-2-3 Strategy

The 1-2-3 strategy is a simple system based on a 3 point chart pattern. When looking at a 1-2-3 downward pattern, the 1 would be at the highest and for a 1-2-3 up, 1 would be at the lowest based on the swing in the pattern. See the diagrams below for more information. Usually the 1-2-3 down trend comes up after a trend that was moving upwards. The 1-2-3 up pattern appears after a downward trend. You only enter the market when the resistance or support of point number 2 is broken. The 1-2-3 up pattern is not valid if the point number 3 is at a point lower than 1. The same with the down pattern, point 3 should not be higher than the point 1 for it to be valid. The strategy cannot be applied correctly if point 3 is at a higher level on the up cycle or lower on the down cycle. To stay safe when using this strategy you need to ensure that you stick to this specific point and not enter the market at this point. This strategy relies on reversal patterns so you need to stick to this one specific rule. This strategy is a little harder for amateurs to grasp, but once the strategy and the highs and lows are understood, the application of the 1-2-3 strategy becomes a lot simpler.

Place a CALL option on breaking the 2nd point line

This particular strategy has been around for many years and is used reliably by traders of Forex, equities and stocks alike. This is a strategy based on price action and the resistance and support principles are clearly laid out. Although this is particularly used as a reversal strategy, it can be used with tends in a normal way as well. In diagram 2, you can see the lows and highs are numbered, the new trend is downward and there have been a number of successful Put opportunities. Whenever the support at point 2 is broken, the market is entered and all trades are taken going with the trend. There is protection from bad trades by making sure that point 2 is broken on the lowest point, if not, this would be a losing trade.

Place a PUT trade on this setup

How does it work?

To use this strategy requires software that can provide accurate charting. To give an example of how this strategy can be used, we will take a down pattern to work with. The opposite would apply for an up pattern. When there has been a strong move upwards, you can start looking for the 1-2-3 pattern to start to form. Start off with the first peak which is the top of the trend if the strategy works out. Should the price continue to increase, you would need to mark the newer high point as point 1. We should see a counter move start and the lowest point of the move can be marked as number 2. If the new move shows up higher than the original point 1, then this strategy will not work for this specific trend. If the new point is not higher than the previous point 1 and the move appears to be downwards, mark the highest point of the latest move as number 2. This completes the pattern but remember to stick to the rule. The price must move low enough to break the point that was set as number 2, which was the lowest point previously. This means that we can enter a trade by choosing Put as we have met the strategy conditions. See images below for more information:

Real-chart strategy usage

Advantsges of this strategy

This particular strategy has a high success rate as it can help avoid bad trades as well as giving good indicators of potential good trades. This is not a fail-safe method as the changes in the market can sometimes be unpredictable and you can end up with some false positives, but overall, this specific strategy has a good chance of earning some good profits if applied correctly.

1 2 3 Strategy explained

Hello, i’m going to share with you the strategy i mainly use for my trading entries and exits.

It’s the old 1-2-3 strategy, everytime price move from A to B, there is always a good opportunity to enter in the market with a good R:R, and a huge probability of success.

I havn’t created nothing new, the way market move is what it is from when market started exist, and will be like this untill they will stop existing.

The strategy
The idea is the following:

Let’s start looking to some charts of eurusd now:

  • Post # 2
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  • Aug 15, 2020 2:43pm Aug 15, 2020 2:43pm

Another chart, pattern inside pattern (GU)

And now.. some patterns happening NOW, next post

  • Post # 3
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  • Aug 15, 2020 2:58pm Aug 15, 2020 2:58pm

(this is not a trade call or any raccomandation)

  • Post # 4
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  • Aug 15, 2020 6:16pm Aug 15, 2020 6:16pm
  • Post # 5
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  • Aug 15, 2020 6:17pm Aug 15, 2020 6:17pm

Actually, the 1-2-3 pattern can be seen on every timeframe, every market.

It can be a perfect entry, but it’s not different from any other entry method.

This pattern it’s just the “tip of the iceberg”.

Of course, the pattern present itself on every turning point, but what we have to do to use it profitably is think in terms of probabilities.

The first and most safe way of trade, is just avoid to try picking bottoms in downtrends and tops in uptrend, ergo Go with the flow, with the trend.

As we see in this image, price is going lower and lower, and the 1-2-3 buy patterns never reach the target.
The more safe way, is to trade this patterns with the trend, and trade them when price is in retrace-mode (expecting a trend resume).
This image even if hypotetical show how price move during a trend.
We can see in this image that price didn’t reach the “buy” targets for 2 times, usually in the real market this “target” failure happen no more then 2-3 consecutive times. However, we are safe if we avoid trade countertrend.

We will cover the counter-trend subject in future, when and why take countertrend trades.

I’m going to post more example and go deeper and deeper in the subject, but what i’m going to do is do it slowly, to avoid confusion.
The subject is very complex and the amount of informations is huge, so we better go slowly.

P.s.
Market has opened, the usdchf pattern was a good one:

  • Post # 6
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  • Edited at 9:23pm Aug 15, 2020 8:01pm | Edited at 9:23pm

Here another image of a current 1-2-3 pattern entry, this looks promising.

I’m late on the entry, and the RR ratio is not soo good, however let’s see how it develop

http://warnsoft.altervista.org/imgs/6.gif
Update: this trade is not open anymore (+50), my exposure was big and was not suitable for a long-term trade.

  • Post # 7
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  • Aug 15, 2020 10:06pm Aug 15, 2020 10:06pm

Hello, thanks for your question.

Basically, the market have a fractal geometry, this mean trends inside trends inside trends.

Now, knowing this, all we need to look is the trend on 2 (or even 3) fractals.

Of course for now, to keep the things as simple as possible, we can look at different timeframes to understand the fractal geometry.

This mean, if we are going to take a trade on a 5min chart, all we need to do is look the trend of 15min (usually correspond to the higher fractal level of 5min chart), and at 30m for security.

As example, if we spot a good 1-2-3 sell pattern on 5min chart, we have to be sure that the 15min chart is in downtrend.
For security reasons, we can look at 30min chart to be sure that it is not in uptrend (and maybe 15min chart is doing a 1-2-3 buy pattern), that’s why i say 2 fractal levels, and give a look to the 3� one to be sure.

Then, if we are going to take a trade on 5min chart we really don’t care about the weekly chart or the daily one, every entry have a stoploss and a target point, so until we follow them all we need is 2-3 fractal levels.

An interesting situation would be when we have for example a sell signal on the 1� fractal level, knowing that the second fractal level is not in downtrend BUT currently forming a 1-2-3 sell pattern too, and where the 3� fractal level is in fact in downtrend. In those situations we can take an entry even if the next fractal level is countertrend, knowing that the target of the first trade will be the trigger for the second one, in situations like this the RiskReward ratio is very huge (like 1:10).

What i mean is, look at very bigger trends is not necessary, but sometime can give very good advantages.

However, for now let’s concentrate on the classic pattern:

Trend
Retrace (1-2-3)
Trigger (point 2 breakout)
Trend resume (Target)

The exit strategy too is important, sometime it’s a good idea to let the profits run, some other time is very important to take the profits at the target point and exit from the market.

I’ll cover this subject in the next days, for now let’s concentrate on the entry-part of the strategy.

It’s time to sleep for me now, thanks again for your question!

  • Post # 8
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  • Aug 16, 2020 2:10am Aug 16, 2020 2:10am

Hello, thanks for your question.

Basically, the market have a fractal geometry, this mean trends inside trends inside trends.

Now, knowing this, all we need to look is the trend on 2 (or even 3) fractals.

Of course for now, to keep the things as simple as possible, we can look at different timeframes to understand the fractal geometry.

This mean, if we are going to take a trade on a 5min chart, all we need to do is look the trend of 15min (usually correspond to the higher fractal level of 5min chart), and at 30m for security.

  • Post # 9
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  • Aug 16, 2020 5:39am Aug 16, 2020 5:39am
  • Post # 10
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  • Aug 16, 2020 6:03am Aug 16, 2020 6:03am

Simple and yet so very effective my friend.

  • Post # 11
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  • Aug 16, 2020 6:20am Aug 16, 2020 6:20am
  • Post # 12
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  • Aug 16, 2020 10:17am Aug 16, 2020 10:17am
  • Post # 13
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  • Aug 16, 2020 11:08am Aug 16, 2020 11:08am

Here is how i do it I trade 1.2.3 break all the time
I use the 20 rsi to confirm
great thread!!

  • Post # 14
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  • Aug 16, 2020 11:16am Aug 16, 2020 11:16am

Hello, thank you everybody for your interest and your messages.

Well, of course we can use divergence as confirmation, however i’m very sceptical about them.
Some time a divergence mean that the trend is loosing strenght and a reversal is imminent, some other times a divergence mean that the real move, the big one, is coming soon.

I just tend to not use indicators, even if i have to can be a great help!

I’m posting a chart about when countertrend trades can be good trades.

Basically, as we can see the overall trend was down, and selling on 1-2-3sell pattern in retraces was giving us good profit.

However, now during a retrace, the 1-2-3 sell pattern didn’t work as expected.
In this case, we continue taking 1-2-3 sell pattern (it’s a little bit more riskious when the first one fail, it means the trend is not soo strong anymore, so a resume or a reverse is both possible).

When this happen, our target have to be modified as show on image.
At this point, when price reach our 1-2-3 sell target, market will be on a situation of decision, resume completly the old trend (down in this example), or reverse it completly for this fractal.
In the image, price fail the 1-2-3 sell patern for 2 consecutive times, and when finally it work out and reach the target on the third try, price found support on the new target and reverse definitively, creating a uptrend.

This kind of trades give the best R:R ratio (because we buy at the start of the 3� elliot wave, the more powerful of a trend).
It’s important when price reach a target after some pattern fail, to put the stop at b/e or to take the profits (up to you), anyway take seriously in consideration the idea that the trend is really compromised and take actions according to that fact.

Now, a real example of the above:
We are talking about eurusd, 15min timeframe, now.

As you can see i’m entered short after the second 2-point break, when (and if??) price will reach the new target at 1.2774 area, we can expect those two scenarios:

A) price drop to the initial target, the low of last week.
B) price reverse and come back to break the high of today.

I strongly discourage to let trades opened even when the pattern fail, i’m doing it because i’m not perfect and sometime take some risks too.
Usually price have to find a good support before reverse a trend, as show in my image (hypotetical situation), that’s why i’m still on my sell trade.
The word “Usually” is not “Always”, that’s why i strongly discourage to do like i do, market follow his own rules usually, but sometime it just don’t care about them.

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