1-2-3 formation forex
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The forex price is continuously dropping until it reaches the 1st pivot point where things may start to change. P-Point 1: This point is the start of the pattern, where the price has reached a new low and bulls are gathering to take over the market. The way to detect this point is to draw a support trend line. Note that if the line is not drawn correctly, it could mislead traders and make them miss some interesting opportunities. However, the 2nd pivot point will determine the accuracy of the 1st In other words, if the 2nd point appears, this means that the trader has successfully detected the 1st pivot point.
P-Point 2: This is the second point where the price typically goes up a little bit. The price hits the resistance level and bounces back. Sometimes it may occur at the same level as the previous high and sometimes lower. In both cases, the appearance of the 2nd pivot point allows traders to set up a confirmation line that they are going to use later when the 3rd pivot point appears. P-Point 3: The last pivot point of the pattern.
During the transition between the 2nd and the 3rd point, prices tend to fall sharply. Yet, the lowest price of the transition is still higher than the lowest price that appeared in the 1st This conditional fall confirms the establishment of the 3rd point. In addition, for the pattern to be confirmed, the 3rd pivot point must be followed by a high spread increase in price. Once this line is broken, the pattern is confirmed and the uptrend has officially started.
Thus, it is advised to put a stop-loss order to avoid any catastrophic forex traders losses. Bearish Pattern example The Bearish Pattern forms after a long uptrend, typically a towering one. The price is continuously rising until it reaches the 1st pivot point where things may start to change. P-Point 1: This point is the start of the pattern, where the price has reached a new high and bears are gathering to take over the market.
The way to detect this point is to draw a resistance trend line. Note that if the line is not drawn correctly, it could mislead forex traders and make them miss some interesting opportunities. However, the 2nd pivot point will determine the accuracy of the 1st point. In other words, if the 2nd point appears, this means that the trader has successfully detected the 1st pivot point. P-Point 2: This is the second point where price typically falls a little bit.
The price hits the support level and bounces back. Sometimes it may occur at the same level as the previous low and sometimes higher. During the transition between the 2nd and the 3rd point, prices tend to rise. Yet, the highest price of the transition is still lower than the highest price that appeared in the 1st point. This conditional rise confirms the establishment of the 3rd point.
Reversal Confirmation Line: This line that is drawn when the 2nd pivot point appears, this line represents the support line that shall be broken through by the decrease in price that occurs after the appearance of the 3rd pivot point. Once this line is broken, the pattern is confirmed and the downtrend has officially started.
How to trade with 1 2 3 pattern? The pattern still appears and the interpretation is the same. However, the pattern forex strategy differ on whether you are aiming at an uptrend or a downtrend. Yet, it is advised to aim at a highly volatile asset, so the profit may be important. In other words, whether you are a short-position trader or a long-position.
If bulls were fully in chart during the retrace at 2, we should not see two shots at the level 3. Price breaks above 2 and you can either enter at the breakout or, my preference, take a position at the close of the candlestick to confirm a true break. You can also put an order to buy slightly above the candlestick that broke the 2 level.
Your stop loss should be below 2 with buffer room to allow for noise. You can also, my preference is coming, use a 14 period Average True Range x 2. Trade Setup 2 Price rallies from 1 and gives us a strong reversal candlestick at 2.
Once price begins to retrace, put this currency pair on your radar. Price find support at 2 inside the previous consolidation pattern from trade 1 and shows strength as it rallied to 2. Once price shatters the 2 price zone, enter at the close of the daily candlestick or whatever time frame you are using and use an ATR stop. The average true range stop for this trade would actually be in the middle of the candlestick that printed just before the breakout candlestick.
We have most variables need for the 1 2 3 trading strategy but price is forming a range near the level at 3. That is NOT something we want to see for a clean 1 2 3 chart pattern. When price is basing in this fashion, it shows that the side that was dominant, in this case bulls, have tired.
As a trader for years, I have seen the following occur: Price trends nicely Weakness shows up in this fashion Traders will take another run to the upside, break 2 and then see this fail back inside This formation of the consolidation is also a great trade entry into the potential of the 1 2 3 chart pattern continuing. Front Running We can position early in the 1 2 3 formation when we have basing occurring.
Ideally, we would like to see some form of basing near the resistance level red line. You can see the green dashed line and then price rockets to resistance. The more favorable setup is to have either basing near the extreme or a slight pullback in price which we see with orange box. The break out then occurs after that pullback. Those types of breaks are more effective and see if you can understand why.
Some would think the first break would carry more weight because the drive started midway in the range. But traders who positioned lower will also look for scalping Forex trades at the top of the range — is that not how you play a range?? The breakout that occurs is driven by traders who went long at the bottom of the range. You can see there was a drive to this level and then a very weak candlestick shows up. This is either traders positioning short in the range or the longs taking profits.
That is the type of thinking you want to have as a trader. Do not trade blind! What Is Your Entry Strategy? As discussed, you can enter at the close of the break out candlestick signal candlestick or entering your trading position at a break of the high. Some traders may want to use a multiple time frame approach and enter on a lower time frame.
In my own trading and in my years as a trader, I look to simplify. Entering at close or breaks of support levels or resistance levels highs and lows of breakout candlesticks is my favored entry Taking Your Profits Some traders would like to see specific price targets to add to their trading plan.
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