Timeframes: Any but suggest you use 5mins and above.
Currency Pairs: Any
Indicators: does not require any forex indicator
WHAT IS THE 123 PATTERN?
In an uptrend market situation, price will make 3 points (refer to the chart below):
- Point 1 is the lowest low point, forms a support level.
- Point 2 will be the peak or the highest point, forms a resistance level
- and Point 3 will be the 2nd low point, a support level ( which must be higher that the point 1 which is the lowest low point.
- the breakout of price above point 2 signals the continuation of the uptrend.
Now, in a downtrend market, the 123 chart pattern forms when:
- point 1 becomes the highest peak when price finds resistance and moves down.
- point 2 becomes the lowest low point (forms support) and price moves up
- only to find another resistance at point 3.
- when price breaks the point 2 support level,it indicates that the market is most likely to continue downward in a downtrend.
(a) Place a SELL STOP order 1-5 pips below point (2)
(b) Place stop loss 1-5 pips above point (3)
(c) Your profit target should be placed at 3 times the stop loss distance
(a)Place a BUY STOP order 1-5 pips above point( 2)
(b) Place stop loss 1-5 pips below point(3)
(c) Profit Target= 3 times the stop loss distance
Here are a few ideas you can use to manage your trade if its in profit:
- if your profit is the same as the amount you risked, move stop loss to break even.
- if your profit is twice the amount your risked, move stop loss to lock in the amount of profit equal to the amount you risked initially. For example, you risked $100 for a sell trade. Now the profit is $200. So move the stop loss and lock in $100 profit.
- or if the trade is in profit by the amount risked, why not close half the position and move the stop loss to break even and let the other half position run?
ADVANTAGES OF THE 123 FOREX TRADING STRATEGY
- based on price action and its very easy to spot this pattern once you know what to look for
- its based on solid trading fundamentals of support and resistance trading
- you can capture the early move a new trend with this strategy and ride out the trend this way as well
DISADVANTAGES OF THE 123 FOREX TRADING STRATEGY
- stop loss distances can be large which depends on the size of the pattern and the time frames as well so you really need to apply position sizing to minimize risk
- a sideways trending market will make this strategy perform poorly as this is a trend trading strategy
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