Many trading traders use the 123 pattern indicator with the alert since this chart pattern is quite strong. If it is correctly identified, it is quite possible to predict probable trend reversals. After all, it is not always possible for a trader to distinguish a temporary correction from a trend reversal. It is through formation 123 that this becomes possible.
The main advantage of this figure is its relevance for absolutely all periods and financial instruments. Also, to the number of advantages, you can add the relative ease of determining the pattern. Still, if the trader does not have enough knowledge and experience, you can always download the 123 pattern indicator and base your trading on its indicators.
Despite its apparent simplicity, the pattern allows the trader to determine the exact levels for making deals and closing them.
Defining a 123 pattern on a chart
Visually, figure 123 is depicted in the format of three consecutive reversals of the price chart, which appear at the end of a downtrend or an uptrend.
An uptrend pattern:
- The first reversal appears at the highest point of an uptrend and represents the start of a short-term downward movement
- The second creates a new minimum on the chart, and after it, the value begins to grow
- The third again takes the price chart downward – below the minimum that was formed by the second reversal
Figure on a downtrend:
- The first reversal is fixed at the extreme point of the downtrend and gives rise to a short-term upward movement
- The second creates a new maximum on the price chart, and after it, the value begins to decrease
- The third move in the price chart up again – above the high that was formed by the second reversal
The pattern is considered completed only if, after the third reversal, the price breaks the level at which the price chart reversed a second time. If this does not happen, it can be argued that the market has not yet formed enough forces to successfully reverse the previous trend and start a new one.
It should be borne in mind that the length of the formation is not always the same. Sometimes the pattern stretches over dozens of candles, so the main thing is to fix the third reversal below the first (for an uptrend), fix the third above the first (for a downtrend). An additional signal is when the first reversal is created from a candlestick with a sufficiently long shadow. You can check reversals with oscillators.
To automatically determine the pattern, just download the 123 indicators with an alert and install it. In this case, the trader will accurately recognize the moments for making deals since there are alerts here.
Basic rules for trading with a pattern
To successfully trade with the indicator, you need to use it correctly in your work. There are several basic rules for concluding profitable transactions, and they are quite simple. And if we consider that the trader does not need to define the pattern on his own (a technical tool with an alert will do it for him), trading seems available to both masters and beginners.
Key trading points:
- A pending order Buy Stop (or Sell stop) is set after the appearance of points 123 above (or below) point 2. It is better to prefer figures, where point 3 is located at a distance of 23.6-50% (maximum up to 61.8%), according to Fibonacci, which is postponed between points 1 and 2.
- Stop-loss is set at point 1. As the value moves in the trade direction, it is allowed to move it for 3. You can immediately put it under point 3 if it pushed off from 50-61.8% Fibonacci between 1-2.
- The minimum take profit should be equal to the distance 1-2, which is postponed in the direction of the value movement from point 3. The maximum value can be calculated using Fibonacci extensions (equal to the distance 1.68 from 1-2, 2, and 2.68, etc.).
- It is allowed to conclude several deals with one lot and fix take profit at different distances. In this case, the profit is fixed at the minimum target, and the rest of the transactions are transferred to the break-even point in anticipation of the development of events: if the value goes further, you need to fix the next take-profit. If not, the stop-loss is triggered at the break-even point.
- It makes sense to use a trailing stop.
- When trading aggressively, you can enter the market on the breakdown of the trend line – after point 3 has formed.