123 Pattern Reversal Strategy Backtest

Your trading strategy gets diluted, and you lose focus. An Anchor Bar is a wide-range, high-volume bar that has the potential to trap the market within its range. That was precisely what happened in this example. From Pivot 2, the market rose and tried to resume the bullish trend several times. Each time, it was rejected as you can see from the long upper wicks of the candlesticks. However, the price bars continued to overlap with the trend line, signaling an indecisive break.

It is formed by three price swings or waves with three swing points, which is where the name of the pattern comes from. For the most part, a pattern forms at the end of a trend. Sometimes, you can see it occur during a trend retracement. If the pattern occurs within a trend, it’s an indication of a possible reversal or deep retracement. If the pattern forms within a trend retracement, it signals that the retracement is coming to an end (i.e. a trader can open a position in the direction of a trend). 1-2-3 pattern is a common formation made of 3 key elements.

You need to identify the highest point of the strong trend. Typically, the stronger the trend, the bigger the reversal would be. Just as it is with any other pattern, you would first need to know how to identify it before you can make any trades using it. For instance, here, if you look to the left, you’ll find a significant price formation that we left out – Anchor Bar.

Look for preceding climactic volume that points to an exhausted trend. Unsurprisingly, this pattern has three key pivots. Forexschoolonline.com is not a financial advisor. Do your research before investing your funds in any financial asset or presented product or event. We are not responsible for your investing results. After a Massive disaster, I came to understand there must have to be a reason before I execute a trade and that is a complete trading plan.

How to Identify a 123 Reversal

In other words, it could give a signal that the trend is not going to reverse. Let’s go from theory to practice and make a backtest with proper trading rules. The 123 pattern reversal strategy is not among the easiest to backtest because it has somewhat subjective rules.

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 pivot points. 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 123-chart pattern is a three-wave formation, where every move reaches a pivot point.

It is a pattern covered in my course; it implies weakness in a downswing. After breaking out higher, price made a quick retrace and retest into the old resistance and new support level. The first chart below is of a ranging market that has just broken lower and through the range support level. Many traders use a pattern in combination with different indicators. Let’s examine how a pattern and Stochastic Indicator work together. Even a perfectly formed pattern can’t guarantee that you’ll walk away with a nice profit.

BABA Example Trade

Continuing to move beyond Point 2, the price forms a new low which is higher than the previous one. This means that the price is too weak to break the last low and form a lower low. There is still a possibility that we’re looking at price consolidation rather than a trend reversal. Stop-loss equals to the distance between Point 2 and Point 1. You need to place a stop-loss slightly above/below Point 1. Because Point 1 acts as a strong support level in a down-trending market and a resistance level in an up-trending market.

When I see the first two points and see price pop to the number 3 point and start to drop, I start anticipating the entry. As soon as price breaks below the highest what is intraday trading (day trading) candle at the number 3 point, I take a short entry with a stop loss just above the number 3 point. As I mentioned, the risk is greater on the second entry.

You should measure the size of the pattern building Line 1 to connect Pivot Point 1 and Pivot Point 3, and Line 2 horizontally through Pivot Point 2. The vertical distance between Line 2 and the midpoint of Line 1 will give you the size of the pattern. Above you see the H1 chart of the EUR/USD currency pair. At the bottom of the chart, you see the RSI indicator. Go to the Withdrawal page on the website or the Finances section of the FBS Personal Area and access Withdrawal.

Plus, it’s important to filter out signals, only relying on the most accurate ones. The Splash and Shelf pattern, unlike 1-2-3, is not an exclusively 4xcube forex broker overview reversal model. However, bears often arrange traps for their opponents. One of them is related to the formation of the pattern Fakeout-Shakeout.

How to trade a 1-2-3 pattern

The 123 reversal chart pattern combines well with a technical oscillator. The reason for this is that oscillators can help signal extreme values, which can provide confirmation of trend reversals. The idea is to match a reversal signal from the 123 reversal setup with a reversal signal from an oscillator indicator. Pivot Point 3 is crucial for the confirmation of the 123 reversal chart pattern.

• That doesn’t negate the second and third entries.
• I didn’t care about anything but finding an entry strategy.
• The straightforward price pattern offers a sound trading approach.
• In 2009, I was still doing that, but my $8000 account was now about $500 and I still couldn’t make money.

Simply put, do not be like a pig that will always find mud. The 123 chart pattern combines well with an oscillator – the RSI for example. We place a stop loss order below Pivot Point 3 and a take profit order at a distance equal to the size of the pattern . You may want to test the environment with virtual money with a Demo account.

The Ross Hook pattern to sell comes after the high. In other words, it comes after the market makes a reversal from the uptrend to the downtrend. Don’t forget that the reversal must be confirmed by the pattern before it can be called a Ross Hook pattern. There is often a second entry point in case you missed the first.

ZUP Indicator

Out of all of the currency trading strategies I have traded, this is by far my favorite. After the reversal pattern has formed, your entry point is where the price breaks the level of your Pivot 2. In a High, the price breaks the support level of the second pivot and makes a dash for the downtrend. Why do traders choose Point 2 to set their buy stops? The answer has to do with the trend identification we’ve mentioned before.

Last note on the 1-2-3 Reversal pattern

For instance, you look for a strong downtrend and wait to see a retracement from the lowest point of the trend. The retracement from that point gives you your Pivot 1. So, if the market is currently in a downtrend, you would look to trade a reversal to the uptrend with the pattern. Conversely, if the market is in an uptrend, you would be on the lookout for a trend reversal to the downtrend.

You’ll find it immensely helpful to experiment with different approaches. Hence, as a reminder, I always try to include a losing example in my reviews of trading setups. This tutorial discusses my interpretation of the setup for trading significant reversals.

Buy Sell Magic Indicator

I will bypass the first entry if there isn’t enough profit. That doesn’t negate the second and third entries. I’ve been working on something similar for several months now.

HUMMINGBIRD Cross Stitch Pattern No.123 – Etsy

It is important to wait for the pattern to form completely, and that price breaks the support of the second pivot before you make any entry. If you only wait for the what are sector exchange-traded funds pattern to form but not the support break before making an entry, the market may hit the support and go back up. No reversal trading strategy catches every reversal.