The Classic 1-2-3 Pattern: An Underestimated Powerhouse

The Classic 1-2-3 Pattern: An Underestimated Powerhouse

In trading, everyone always wants to complicate everything – why? Simply because having 8 screens with a lot of blinking lights is what we see on TV whenever we hear the word trader. Now while some of the infos these people in the pit, or wherever, have on their screens are certainly beneficial, I promise you, you can trade just as profitably with one screen alone and only 1 to 3 indicators, or even no indicators. You don’t even have to read the tape, the DOM, the ladder, the matrix, whatever. You simply have to observe, mainly: lows and highs, and where they occur in relation to the last lows and highs. Sounds familiar? Enter the 1-2-3 pattern. Or, A-B-C pattern, to your liking.

 

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This pattern is comprised of a low, a higher high, a higher low, and a break of the higher high (in case we are going long). 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 1-2-3 pattern works best when going with the trend but can also be used as a reversal pattern when bouncing from S/R and after we have topping structures in place like H&S, double/triple tops and bottoms, etc. The 1-2-3 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.

Targets are usually Fibonacci extensions and/or the next S/R level, or when we see signs of price exhaustion like divergence on one of our indicators. Here is an example where when the 127.2 extension reached, I usually target the 161.8 – however in this case it was not reached.

 

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Now there is something called the trader’s trick entry, coined by Joe Ross (who also coined the Ross Hook, will get there in a minute). This entry method suggests actually entering between point C and B, before point B is reached – and actually going to breakeven when point B is reached. That way we can make sure we are not going long at a market top. This can be achieved by using Fibonacci retracements, S/R retests, and by other means – what I usually do, however, is to simply look for another 1-2-3 between point B and C, in order to get in (or other patterns, but this is material for another article). Here is an example:

 

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As you can see in the picture above on the right side, between point B and C of the original pattern, we got another 1-2-3 which we could use to get in before we actually reached point B, which in this case saved us from a stressful trade – it would not have been a loss as our SL always goes below point C, but it would have been stressful to say the least.

Now, after point B broke, we have two additional means of stacking our position. One is the retrace to point B, as in this example:

 

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The Ross Hook

And finally, the so-called Ross Hook (basically another 1-2-3), which is the first retrace after a successful 1-2-3 formation. In the example above, we would enter as follows.

 

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So, there you have it, a potential 3 entries on one formation. Important is that you know where the overall trend is going, and that you don’t trade every tiny retrace. This is where my indicators come into play: I use the MACD on the longer timeframe window to confirm momentum, and the CCI on the trading timeframe window to confirm that a pullback has indeed been deep enough to build up enough momentum to the other side (swingin’, swingin’).

If you spot patterns like Head and Shoulders, double tops/bottoms, and other popular topping structures, on the higher timeframe, and a 1-2-3 on the lower timeframe, you got yourself a great trade. Or, you wait until a high or low gets broken on the higher timeframe, and then wait for a 1-2-3 on the lower timeframe to get in. All viable options to enter with the trend, with the momentum, and with structure in your back to protect your stoploss.

Overall, the 1-2-3 is an incredibly awesome pattern that follows the simplest market analysis there is: where are our highs, and where are our lows, and in which relation to each other did they appear on our charts?

The 1-2-3 provides us with clear entries, clear stoplosses and clear targets through extensions. What more could we ask for? Let me know in the comments below what you think!

Comments ( 8 )

  • John Wade

    Nice article . The 1-2-3 trading method was the first trading method I learned over 20 years ago. 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 1-2-3 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. Thanks for the article very nicely done .

    John Wade
    Day Trader
    Nashville , TN.

    • Austin Power

      It is well! Thanks to God you finally figured it out. No one can deceive you again. Stay blessed.

  • Austin Power

    You are indeed among the real guys in trading…this post got my immediate attention as it reveal the road to wealth in forex trading. God bless you for saying the truth, the young ones will no more be misled if they adhere to this truth. Peace be with your soul Rolf.

  • Tony C

    I echo john’s sentiments above after trying lots of different trading ideas, the simplest ideas tend to be the ones that get results. I would also add in the importance of looking at where S/R is beforehand (usually with reference to a higher timeframe), so those 1-2-3 patterns become more reliable. I dont think a stop below point B is ideal as that will quite often get taken out on a stop run; your stop should be below Point C – in fact some way below that even. If you size your trade accordingly, you can take a greater risk on that first portion, then as further confirmation comes you can make further entries and so on. I have never heard of a bank trader who trades by entering their full position at one price, but that is conveniently the way most trading courses teach you to trade; I have come to the conclusion that avoiding maximum risk is preferential to seeking maximum reward.

  • Tony

    I meant of course in my previous comment that the ideal Stop should be below point A not point C (as typed).

  • Cornel

    Very good blog. Also The Law of Charts by Joe Ross is another viable structural map to use in trading arsenal. Thank you.

  • Harjot

    This pattern is as close as one can get to the trading holy grail. And yet it is as easy as 1-2-3 🙂 If you can master this 1 pattern, success is guaranteed. My favorite entry is to spot 123 formation on higher timeframe and then enter on a 123 pattern on a smaller timeframe – works like a charm

  • Mx

    Hi. Do you mind showing how do you use the macd and cci to confirm the trade ? Thanks

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