Secrets of work according to pattern 123
The pattern is used to work in the myforex market in weekly trading system that do not use mathematical indicators. Its application is based on the classic definition of the trend and the entry into the market for bounce, correction and, possible change of the trend.
For successful trading under the Price Action pattern it is necessary to know all nuances of its construction, entry into the market with its use, and, accordingly, exit from deals. We will discuss this in this article.
Pattern 123 is a turning graphic pattern that is quite common on graphs and is a good signal to enter the market. It is formed at the end of trends, levels of support and resistance, the end of corrections.
Consider the pattern of 1 2 3, which is formed by changing the trend from bear to bull, which is represented in the graph above. It is formed as follows. The price with a spire updates its minimum - point 1. Then, as a rule, there is a bounce due to the removal of footsteps, the entry of new market participants and the actions of the marketer. It lasts several Japanese candles, and ends with a spire up (point 2) from which the correction to point 3 takes place.
A very acceptable confirmation of the trend fracture is the update of the price value at point 2. The same update, in turn, is the entry point, in our case in the long position, according to the strategy of pattern 123. The minimum target, when entering the market like this, is the distance that is equal to the price difference between points 1 and 2, counted from point 3. The security warrant for this position is set several points below point 1.
From the reasons that reflect the actions of market players, it is easy to understand why the pattern works well on the entrance made on it.
Consider the step-by-step formation of this pattern:
The first signal to the trend break is the downtrend rollback after the spire at point 1. The price shows it cannot, for whatever reason, go to its next low.
Then there is the repeated upward movement of the price, which already presages a change of trend.
Updating the maximum at point 2 is a strong confirmation of the market reversal. Stop the losses of traders who entered point 2, waiting for the bear movement of the market to continue, at the same time are carried out. And the market crowd, in turn, is actively included in the bull movement, seeing the price go up with confidence.
How do I trade a 1 2 3 pattern?
Consider the pattern that is formed when the trend changes from bull to bear. After we found this pattern on the price chart and entered on it the market, it is necessary to follow the following simple rules of trade:
The best entry into the transaction is the update of point 2 - the previous price maximum (or minimum, depending on the direction of pattern formation). Enter the market, at the same time, follows a delayed warrant.
The stop loss protective warrant is set below (above) point 1, which has formed a price extremum of the market - the first option. The second option is to set the foot below (above) the local minimum (maximum) formed at point 3. It is often used in aggressive trading and is not suitable for all traders. Of course, it is much better and safer, when issuing a protective warrant, to act on the first option and give the price more freedom to move in the market.
The minimum target given by pattern 123 can be determined as follows. We consider the difference in price between points 1 and 2 and establish a teak profit from the entry point equal to the resulting number of points. By the approach of the price to the level of our teak profit you can use partial position fixing and drag the teak further along the trend, counting on its change. The further along the new trend the price goes, the more confirmation the pattern receives.
The pattern 1 2 3 strategy allows entry between points 2 and 3 without waiting for the local minimum at point 2 to be updated. The aggressive opening of the market position, in this case, can be performed on the break of the trend line that connects points 2 and 3. The levels of the original target and the stop of the warrant do not change. This entry is more risky, as the market may not update the local extremum at point 2, and therefore not change its direction.
What is typical of a pattern?
The pattern 123 may contain within it a different number of weld bars from point 1 to point 3. It can range from 4 to more than 20 candles. However, the basic rules of working with the pattern do not change. It should be understood that the more bars involved in the formation of the pattern, the greater the potential of the forthcoming possible change in the trend of market movement. This is not a strict rule, but for most cases found in the market, it is true.
If, we see that point 3 begins to approach the price level of point 1, we can no longer consider the resulting market figure to be pattern 123.
Also, in order to talk about a fully formed pattern, it is necessary to see on the price chart the break of the local extremum at point 2.
In the market there are sometimes cases where the price enters into consolidation between points 2 and 3 and does not give signals to enter the market. According to this forex trading strategy, such situations are preferable to wait and not open a position.
Quality pattern 1 2 3
Consider forming a pattern when changing a bull trend to a bear trend. We saw and identified a bullish trend. The price breaks through the resistance level and makes a spire (point 1). It then rolls back to point 2 and adjusts to point 3, where a new price maximum is attempted. Further the price is developed. It updates the value at point 2 and goes lower, forming a new trend.
It is highly preferred that the candle on which point 1 is formed has a long upper shadow. If there is no such shadow in the Japanese candle, or it is a small number of points, it is a sign of the "weakness" of the given pattern, which shows that it may not work out. The longer the shadow, the better and stronger the 1 2 3 pattern.
In our example, the candle shadow is quite long. This suggests that the crowd is beginning to be dominated by bearish sentiment and is ready to sell. Which we can observe when moving the price from point 1 to point 2, after which the upward movement resumes, but already with less force to point 3. Now, according to the strategy description of pattern 1 2 3, we have the right to issue a deferred order for sale at point 2.
If, after the formation of the price at point 3, the price passes to the flash, begins to consolidate and does not show the expressed direction of its movement, then we do not open the position and do not establish a deferred warrant.
For scalping trade, we will only consider pattern setups during European and American trading sessions.
When trading on day schedules, attention should be paid to the gap that can be formed when opening in an Asian trading session after a weekend break.