The unfolding of the pattern step wise, would be as follows -. See if you can find some type of consolidation on your trading time frame or even a lower time frame. Now we are going to move into the trading strategy section of this course. With an earlier entry off the lower time frame 1 2 3 reversal, you will have an opportunity for a slightly larger position size. Also watch for reversal candlestick patterns at point 3 to trigger the entry.
FREE TRADING STRATEGIES
A long trade is then entered when price breaks the previous high formed at point 2. Since this is all that the pattern consists of, it is very easy to spot for a confirmation of the change in trend. Working of the pattern. If we look at the fundamental reason for the forming of this pattern, we can see why it works so well.
The unfolding of the pattern step wise, would be as follows -. At this point, everybody is going long creating the extra momentum for the upwards trend. And when these stops are hit, these breakout traders will tend to cover their positions by going long, driving the price up with thrust.
Once this pattern has been spotted, let us define some very simple rules for managing the trade. Entry - The ideal entry should be taken on the break of the point 2 — the previous high or low as the case maybe. Stop - The stops to be placed beneath the low of point 1. Aggressive traders may even place the stops below the point 3, but it is always better to give price enough room to move without hitting the stops.
Price targets - While this pattern does not give any projected target, a minimum target can be estimated by the measured move concept. Calculate the distance from the point 1 to point 2 in the formation. Add this to the low of point 3, and this should be the minimum distance that price will travel to.
The setup of the entire pattern from point 1 to 3 could take place in 3 bars or as long as 20 bars. But the rules of pattern remain the same. A point to keep in mind here is that more the number of bars involved in the setup, bigger should be the move. This is not a fixed rule, but more often not, this concept is followed by the price. Allow the pattern to prove itself before entering a trade.
If point 3 forms below point 1, the pattern is negated. Similarly price has to break the high of point 2 for confirmation. At such times it is better to stay out, till price action confirms a direction.
Example of the setup - a bearish pattern. We have just completed the section on the reversal pattern as confirmation of the end of the trend. However, while the end of trend top and bottom is a great entry method for taking reversal trades, most of your trades as swing and day traders will be trying to get into a trend move — getting into the trend in the middle of it. Notify me of follow-up comments by email.
Notify me of new posts by email. The Good Vibrations EA. The Divergence Trader EA. The Divergence Finder EA. The Degree Forex Indicator. The Grid Trend Multiplier. The No stop hedged Grid trading EA. Continuous improvement Forex Transaction checklist 2nd Secret: One of the easiest ways is to just trade the breakout of the pattern.
Another way to enter is to monitor price as it approaches swing 2. See if you can find some type of consolidation on your trading time frame or even a lower time frame.
This will position you before the breakout and if the breakout succeeds with momentum, you will find yourself in quick profits. You can use somewhere below or above the 3 or use an ATR stop that measures the volatility of the market. Just ensure you are not placing your stop loss too close to market action. The main drawback of the 1 2 3 pattern is that stops can be fairly large depending on the length of the leg. Traders may, once they recognize the pattern on a higher time frame, drop to a lower time frame and look for the same pattern on a smaller scale.
You will get an earlier entry and a smaller risk profile as well. You should consider using the same stop location as you would on the higher time frame chart. With an earlier entry off the lower time frame 1 2 3 reversal, you will have an opportunity for a slightly larger position size. You can use the same pattern to exit the trade as well. Once price takes out 1, you exit the trade regardless of the profits you have accumulated.