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If the 123 chart pattern is valid, then the price is very likely to break its previous trend line after creating Pivot Point 1. At first sight, there is nothing particularly special about this chart pattern. After all, every price move in the market will create a pivot point occasionally right? Yes, but if you have the ability to identify and confirm the 123 pattern, it can help you predict potential reversals. This system consists of three different indicators which help traders to identify and trade in the right direction of the market near support and resistance zones.

123 pattern

The stop would then be placed above the new point 1, and previous stops would be moved to the new point 1. These positions would be considered “add-ons” for position and swing traders. In a trend, the first 123 pattern is the reversal pattern that occurs at market tops and bottoms. The second and third set of internal 123’s continue to confirm the uptrend or downtrend.


The strategy is based on the idea that the market is losing momentum in the direction of the major trend and could reverse any moment. The probability of this strategy is high and does not require knowledge of technical indicators. The 123 formation is classified as a major reversal pattern and is one of the best indicators of a trend reversal.

In the image below I have drawn an example to highlight how a basic bullish 123 reversal pattern is created. Most homes have some risk of natural disasters, and may be impacted by climate change due to rising temperatures and sea levels. Stop losses for 123 tops should be set above point 1 initially, and positions need to be sized accordingly so as not to exceed the risk limit for the trade.

123 pattern

The point must not exceed the pivot point 1 for the pattern to be valid. The price breakout above point 2 signals the continuation of the uptrend. Whilst this pattern can be used to spot trend and market reversals, it can also be used to spot new potential trade opportunities. If we use with other techniques such as double tops and bottoms, recent momentum and key level breaks, then we can quickly spot when a market is looking to reverse. A closer look at the price action before the breakout shows that momentum was building to a breakout lower with a 123 pattern.

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Turn Your Trades into Winners!

It is based on the principle that the potential profit should be 3-4 times greater than the risk accepted by the trader. In this scenario, even a trading system with a probability of less than 50% will give positive financial results. From this higher swing low price then resumes the upward movement, thus confirming the change in the trend. A long trade is then entered when price breaks the previous high formed at point 2. If you didn’t close at the target level and decided to hold the trade further based on bullish price action conditions, the profit would have equaled 108 pips in this case.

  • So only look for such pattern in a trending market, no ranging ones.
  • Forex Pattern Indicators can work alone to solve all these issues and keep your trading life easier and much more relaxing.
  • I would also add in the importance of looking at where S/R is beforehand , so those patterns become more reliable.
  • Sell signal near the resistance zone is signal for long entry.
  • The breakout candlestick must breakout to the downside and close below point 2.

The reason for this is that it is the last component of the setup. In a valid 123 reversal pattern, that point would not exceed Pivot Point 1. Pivot Point 3 moving close to Pivot Point 1, but not reaching it is an indication of a stronger 123 reversal pattern setup. As you probably notice, the parameters of the 123 trading pattern are the same as with the double top and the double bottom chart patterns. In fact, when approached as a reversal pattern, the 123 setup is indeed either a double top or bottom. The trading method was the first trading method I learned over 20 years ago.

Alas, this is just a deception, a trap created in order to take money from the plankton. This pattern is comprised of a low, a higher high, a higher low, and a break of the higher high . In the picture above, at the break of point B we are going long, stops go below point C. Some people set a pending order at B, some people wait for a confirmed break. The brings enough momentum with it that we almost always can go to breakeven before price reverses on us, and if it doesn’t, we can get great runs out of this momentum pattern.

Risk Disclaimer

I have been actively trading the financial markets since April 2012. Besides trading with my personal money I am a technical analyst in a mutual fund that has Rs. 1 billion in assets under management. At my leisure, I love attending live music, traveling, and partying with friends.

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. If the price is below the Day signal ultra Day look and Day Exp indicators are forming White histogram then it means prices are in pullback zone after Downtrend.

The pattern needs a system of filters to improve the efficiency of trading. As per our conditions, we place our stops above the point.1 of the formation, and estimate the minimum distance that price should go to. As velocity trade we can see, price easily surpasses the minimum distance, giving a good short trade. There will be times when price will consolidate within the area of points 2 & 3, without giving any indications of the direction.

Pattern Reversal Strategy (Backtest)

If I had just stayed with it starting back then , I have no doubt I would be way ahead of where I am today with my trading. The search for the elusive ” Holy Grail” trading method has cost me a lot over the years in terms of time and money . I have come to the realization that simpler is definitely better . The trading method has always worked and been profitable and will continue to be as it is all about support and resistance . The pattern shows up multiple times each day on lower time frames offering several trade set-ups daily.

Another way to Trade Forex 123 Chart Pattern

This website is free for you to use but we may receive a commission from the companies we feature on this site. 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 How To Use Bootstrap 5 plan. Price is moving lower in a downtrend before forming part #1. This is a move back higher against the trend or overall move currently in place. Part #2 is a move inline with the trend, but crucially a new higher low is formed.

See that the price doesn’t hit our green take profit line at first. Instead, we see a correction with the shape of a Flag chart pattern . Note that at the same time the RSI indicator breaks its green trend line, but it hasn’t reached an overbought area.

Applying it from the start of the confirmation level will give you your approximate target level. This might be a good opportunity fbs broker reviews to enter the market based on a valid 123 reversal! If the price breaks this level, then the pattern is said to be confirmed.

ABC Patter or 123 chart pattern: template and Indicator

The most popular variety of pattern is the Splash and Shelf model described in Linda Raschke’s best-selling book Secrets of Top Trading Performance. She assumes the formation of a peak in conditions of a bullish trend with the subsequent formation of consolidation. The market mood is changing rapidly, and the bears intercept the initiative in case the lower border of the trading range is broken. Conservative traders should click SELL after the closure of the breakout bar.