1-2-3 Pattern Trading System

The “1-2-3 Pattern Trading System” has been around since trading first began and is still one of the most widely used set-up patterns even in today`s high tech world. The construction of the pattern is the foundation of many trading systems, due to its ability to detect the psychology of the market. This may sound a little deep, but basically it means a failure of the price action to carry on its journey will result in an imminent reversal. When the price makes a new high or low in comparison to recent price action, you would expect the price to try and surpass this new level after taking a breather by pulling back a little. Failing to reach these new levels will produce a 1-2-3 Pattern.

From the screenshot above, figure 1 represents the new high and number 2 represents a pull-back that is normal and happens constantly. But when the price starts moving back up it is unable to reach the previous new high (no 1) and starts moving down. This is our number 3 in the set-up pattern and we will now be looking to enter short position.

 This is the classic 1-2-3 pattern short trades set-up, sometimes call the Second Swing Low, and you will literally see hundreds of them as you scan through your charts. 

The screenshot above highlights the classic 1-2-3 trading set-up as the price fails to make it back up to the new high and then moves down below number 2 point where we have an order waiting to go short.

  

Basic 1-2-3 set-up for a long trade

 

The screenshot above depicts the classic 1-2-3 set-up for a long trade. The price swings up after making a new low (No2) and then starts to move back down creating our (No 3 Point) but fails to go down to the new low and starts moving up again. The set-up is now complete and we can place an order to go long level with the no 2 point. All trading systems need to have money management controls, with stop losses and take-profit targets. The 1-2-3 trading system provides perfectly clear areas for the stop loss and also a suggested take profit-target areas.

Stop Loss: When a trade is entered as the price reaches our number 2 point (either long or short traders) the stop-loss order should be at the number 3 position.

Short Trade 

The Exit We have different options to use as our exit with this system, and you will have to use the one that suits your personality best. Exit 1 Have a predetermined target; either at least the same amount as you are risking or twice or 3 times the risk. Exit 2 Follow the trade by moving your stop-loss order as the price makes pull-back highs (short trades, opposite for long trades). Each time a new pull-back high is made ride the trade down. Exit 3 Employ a trailing stop. Exit 4 Move you stop-loss order to break even as soon as possible, this way you have eliminated the risk completely and can enjoy the trade (stress free!).  

The beauty of the 1-2-3 trading system is that it works on any time frame and any trading instrument. The rules are simple to follow and the trades are abundant, even for the most active trader. It`s no wonder why trading this system has been around for so long and is so popular.

This is one of my personal favourite trading systems, because it is so dependable and easy to follow. The system gives you everything you need at one glance, and the rewards, compared to the risk, are highly favourable. With any trading system practice makes perfect and the best way is to first practice on a demo account. You must remember a trading system is a component part of a trading plan and by having a structured, short, medium and long term plan in place your chances of wealth building will be greatly increase.