The 123 Forex trading strategy is based on price action and normal Forex market structure that any trader should know. The 1 2 3 trading strategy is used as a continuation trading setup that is designed to take advantage of the trend of the market.
The failure of the 123 trading strategy is also a trade setup but can also warn you of potential price consolidation in the market or even a trend reversal in whatever Forex pair you are watching.
Keep in mind that even though it is a continuation pattern upon confirmation, it is also a reversal pattern from the short term trend direction.
1 2 3 Trading Pattern Formation
In any trending market, there is a pattern of higher highs and higher lows. In order for the trend to the upside to remain active, each successive impulse swing must take out the point 2 in the formation. When price surpasses the price at #2, the trader can use that as confirmation that the 1 2 3 chart pattern is present.
This is a line chart that explains the concept of the 1 2 3 trading pattern and in this case, we are assuming an up trending market
1 2 3 Trading Strategy
Let’s walk through each number and this pattern should be familiar to any trader who’s been looking at charts for a while.
When an uptrend pulls back, it will put in a low and from that low, price continues to rally.
This acts as short term potential resistance. Price rallies to this point and then begins to retrace back in the direction of the price at #1. We DO NOT want to see price retrace all the way to the price at #1. If it does, we will consider that to be the formation of a double bottom chart pattern and would trade that according to the trading plan you have set up for that price pattern.
This level is also considered a #1 only when the price level at #2 is broken. This price point is the level at which the corrective move completes and the price reversal to the upside begins.
Please note that the 1 2 3 price pattern is only confirmed once the high at point #2 is taken out by price.
You can also see that the 1 2 3 trading strategy is taking advantage of the stair step nature of the market that is needed if a trend is going to continue. It is at the confirmation of the patter that a trader can place a conservative trading position in the market
1 2 3 Chart Pattern By The Numbers
In an uptrend market situation, price will make 3 points
Point 1 is the lowest low point, forms a support level.
Point 2 will be the peak or the highest point, forms a level that we consider as potential resistance
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.
In a downtrend market, the 1 2 3 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
Finds another resistance at point 3.
when price breaks the point 2 support level,it indicates that the market is most likely to continue downward
Trading Strategy Trading Plan
Let’s take a look at a potential trading method to trade the 1 2 3 trading strategy. We will look at a conservative method for those traders that need a little extra confirmation in their trades.
Keep in mind there is a cost involved. The longer you wait to get involved in a trading position, the larger you will have to make your stop loss.
123 Trading Plan
Trade Setup 1
You should be familiar with the numbers and what they represent on the chart. We can see that price rallied from point 3, found resistance at point 2 and retraced. We now have a double bottom chart pattern and just as the 1 2 3 trading strategy needs a breach of #2 to confirm the pattern, so does the double bottom.
If you do get a double bottom after a move in price, that could signify weakness in the market. 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.
Trade Setup 3
Each trader should understand this pattern by now so let’s focus on the range that is occurring. 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.
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.
That is not conducive to a sustained break of 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?? Yes. The breakout that occurs is driven by traders who went long at the bottom of the range.
Let’s see some detail in this chart
Price could not rally far from the low which is showing the 1 2 3 chart pattern – the stair stepping in a trend – is under attack. Price can’t break lows so traders go into range trading mode
The formation of this smaller range allows traders to position with a tighter stop loss just under the small 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. Other traders see the power of trailing their stop loss to take as much as the market is willing to give.
You can use structure targets such as higher resistance levels in an uptrend.
You can use legs 1-2=3-4 which suits the 1 2 3 trading strategy.
One to One Targets
I color coded each swing so you can see where I am measuring from. I use the 3 point Fibonacci tool and set it to the 100%. You can see the first two trades nailed the targets. The third trade hits the .618 Fibonacci level which is quite popular when used to portion out swing points.
The 1 2 3 trading strategy is a pure price action trading method that uses a sound approach to trading.
No trading indicators are required although I do suggest the ATR for stop loss placement.
You must have a proper risk protocol as part of your trading plan.
One Forex strategy that you might like to try is based on a straightforward indicator known as theSimple Moving Average (SMA). The SMA Forex trading strategy aims to provide the highest possible return for the amount of risk assumed. The SMA measures a security’s value during a specific time frame, to give traders a better sense of when to buy and sell a currency pair.
For example, if you set up a 12-period SMA with 15-minute intervals, any increase in the currency pair’s value above the 12-period SMA could present a signal to buy. Likewise, should the currency pair’s price fall below the 12-period SMA, it could be a signal to sell. This popular Forex trading strategy may be good for beginners as it can be used with any time frame, and with most trading instruments.
Additionally, you can combine the SMA with helpful tools, like indicators. Traders may choose to use the SMA as the foundation of their strategy, and then build from there. No matter what you do, remember to test all Forex trading strategies on a Demo Account first, before going live. One way beginners can develop their own approach is to test more understandable SMA-based trading strategies, and then add other indicators when and if consistently desirable results are achieved.
Optimise Potential Profit with Positional Trading
You cannot predict which strategy will provide you with the most success, or indeed any at all. However, positional trading could be a potentially profitable Forex strategy. Positional trading involves holding positions over the long term – usually, between one month and a year. It has the advantage of being largely hands-off. However, it requires a long-term plan, and the ability to predict future market direction. To get started with positional trading, you must first pick an asset. When determining which currency pair to use, there are three factors you need to consider:
High Long-Term Volatility
Volatility is crucial for turning a profit. You need to pay for ‘SWAPs’ every night in order to hold a trade open, and you could easily suffer a loss on any given night, unless your currency pair experiences some notable price movements within a few months. One way to increase the odds of success is to select currency pairs that may feel influence from:
Upcoming political events
Economic events in the near future.
Low Short-Term Volatility
A currency pair with low short-term volatility is more likely to move slowly in the direction of your trade, instead of experiencing sharp fluctuations that might prompt you to close your position.
Use Low Margin
While Forex traders frequently trade with very highleverage, this approach is not suitable for positional trading. When it comes to positional trading, keep one thing in mind – the less leverage you use, the better it may be. To determine how much margin to use for your Forex strategy, consider the following variables:
The amount of money you have outside your trading account – remember to only trade with risk capital
How much leverage will provide the best risk-reward ratio
Benefits of Scalping
Source: EURUSD Chart – Data Range: May 2016 – An example of scalping – Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
While positional trading may (or may not) produce great benefits, trading can appeal to many different types of people, for different reasons. Some traders enjoy spending time watching the markets, as doing so gets their heart beating and their adrenaline flowing. One Forex strategy that may provide this adrenaline rush is scalping. The idea behind the scalping strategy is to complete a large number of trades that individually generate small rewards – between five to ten pips each.
Traders usually keep these positions for one to five minutes, and spend all day monitoring buy/sell signals. Some professional traders have generated great returns with this approach, including Paul Rotter. Mr. Rotter attained legendary status with scalping and earned the nickname ‘The Flipper’ for his quick trading actions. Rotter would open buy/sell positions simultaneously on the derivatives exchange ‘Eurex’. When traders responded, he would quickly scalp profit from one alternative.
One crucial factor in Rotter’s success was to closely watch the order book. To cultivate your own unique and efficient Forex trading strategy, consider these key variables:
Your desired risk-reward ratio
Your tolerance for stress
How much time per day you want to spend trading
Most importantly, only use techniques you fully understand and never stop improving your strategy. A free Demo account is perfect for testing new things out risk-free, and for working on your overall performance.
The Another one of our free forex strategies trades a confluence between daily Pivots and Fibonacci retracement levels.
The Daily Fibonacci Pivot Strategy uses standard Fibonacci retracements in confluence with the daily pivot levels in order to get trade entries. My preferred parameters are the 38% or 50% Fibonacci levels in confluence with the daily central pivot. The examples following show entries at the 38%, 50% and 62% Fibonacci retracement levels in confluence with the daily central pivot.
As with all free forex strategies, there are many possible interpretations and variations. My particular take on this strategy is as follows:
look for an entry on any currency pair where the average true range for the last five day period has been exceeded in the previous day’s trading session
at the start of the current trading session draw fibs:
look for a confluence of Fibonacci retracement levels with the daily central pivot
If price retraces to the confluence identified, either enter at market or wait for a confirmatory candle signal to occur at the confluence before entry. Obviously, it is more risky to enter before getting the confirmatory signal, but such an approach gives a greater possible reward to risk ratio.
Let’s have a look at a few charts to see how this works.
The first chart shows a long entry at the confluence of the 38% Fibonacci retracement and the daily central pivot:
It was possible to enter either way here, either by buying at the first touch of that level, or waiting for the morning star candle formation to form. Both entries would have given a possible target at the 127% Fibonacci extension level, which was easily reached.
The suggested stop loss for these trades is behind the Fibonacci level one level away from where you take the trade. In this case it would amount to the 50% retracement level, with a few pips extra thrown in for buffering.
The next trade shows the reverse setup of the previous trade, with a sell occurring at the confluence of the 38% retracement and the daily central pivot:
This was a nice set up given the big drop that occurred in the previous trading session. That drop signified a change in sentiment which would have added weight to the decision to sell.
Another example, again, a sell after a long run down the day before:
This time the sell occurs at the 50% retracement level, although it is not in perfect confluence with the daily central pivot. Still, a nice evening star pattern occurred with both the daily central pivot and the 50% retracement level being respected prior to entry,
The last example shows a confluence of the central pivot with the 62% retracement level, plus old lows at the left of the chart:
This is an example of the fact that any pivot level can be used in confluence with the daily central pivot. In this case price retraced to once more retest the entry-level on the next day, but you should have had profit taken out of the trade by then, if not having exited at full profit.
As always with any new strategy, and in particular free forex strategies, remember to fully back test and live test in a demo account before going live with this particular play, if you decide it is a good fit for you.
The ABCD is a basic harmonic pattern. All other patterns derive from it. The pattern consists of 3 price swings. The lines AB and CD are called “legs”, while the line BC is referred to as a correction or a retracement. AB and CD tend to have approximately the same size.
A bullish ABCD pattern follows a downtrend and means that a reversal to the upside is likely. A bearish ABCD pattern is formed after an uptrend and signals a potential bearish reversal at a certain level. The rules for trading bullish and bearish ABCD patterns are the same, you will just need to take into account the direction of the pattern you trade and the movement of the market it predicts.
There are several types of ABCD pattern (all the 3 patterns at the picture are bullish).
In the classic one, the point C should be at 61.8%-78.6% of AB (Use Fibonacci retracement tool on AB: the point C should be close to 61.8%). The point D, in its turn, should be at the 127.2%-161.8% Fibonacci expansion of BC.
Notice that a 61.8% retracement at the point C tends to result in the 161.8% projection of BC, while a 78.6% retracement at the C point will lead to the 127% projection.
There is also the so-called AB=CD pattern. Here CD has exactly the same length as AB. In addition, it takes the market the equal time to travel from A to B as from C to D. As a Result, AB and CD have the same angle. This type of ABCD pattern is seen quite often and is popular among traders.
The third type is when CD is the 127.2%-161.8% extension of AB. CD can be even 2 times (or more) bigger than AB. There actually are some signs that can hint that CD will be much longer than AB. They are a gap after point C or big candlesticks near point C.
The key thing you should remember is that you can enter the trade only after the price reached the point D.
Study the chart looking at the price’s highs and lows. It may be helpful to use ZigZag indicator (Insert – Indicators – Custom – ZigZag) that marks the chart’s swings.
Watch the price as it forms AB and BC. In a bullish ABCD, C must be lower than A and should be the intermediate high after the low at B. Point D must be a new low below B.
When the market arrives at a point, where D may be situated, don’t rush into a trade. Use some techniques to make sure that the price reversed up (or down if it’s a bearish ABCD). The best scenario is a reversal candlestick pattern. A buy order may be set at or above the high of the candle at point D.
Take profit levels
Here are the target levels for trading the ABCD pattern.
TP1: 38.2% retracement of AD
TP2: 61.8% retracement of AD
TP3: point A
We recommend using these levels together with support and resistance you identify at the chart using various tools of technical analysis. Don’t forget to have a look at senior timeframes when you hunt for support and resistance levels.
If the price moved to TP1 fast, the odds are that it will continue towards TP2. On the contrary, if the price is slow to get to TP1, this might mean that it will be the only TP level you’ll get.
There are many cases when the market reversed after AC=CD pattern going beyond point A.
As for Stop Loss, there are no special recommendations. You can put a Stop Loss in line with your risk management rules.
Here’s an example of the ABCD patterns on the chart:
You can find many ABCD pattern on one chart. The rules for trading each of them are as explained above. Make sure that you know how to apply Fibonacci tools correctly an follow all our tips.
The price of gold has reached the 1500 level for the first time in over six years (April 2013). In the process the pair has now moved above the 50% retracement of the move down from the 2011 high price at $1483. That is now a close risk level for longs. The run higher continues as flight to safety flows dominate. US stocks are tumbling with the Dow down -568 points or -2.11%. The S&P index is down 1.89% and the NASDAQ index is down -1.63%. US yields are also tumbling with the 10 year down 9.7 basis points at 1.606%. There was a research report from PIMCO saying US yields going negative is a possibility.
Pres. Trump is focused on the Fed today, tweeting:
A pin bar pattern consists of one price bar, typically a candlestick price bar, which represents a sharp reversal and rejection of price. The pin bar reversal as it is sometimes called, is defined by a long tail, the tail is also referred to as a “shadow” or “wick”. The area between the open and close of the pin bar is called its “real body”, and pin bars generally have small real bodies in comparison to their long tails.
The tail of the pin bar shows the area of price that was rejected, and the implication is that price will continue to move opposite to the direction the tail points. Thus, a bearish pin bar signal is one that has a long upper tail, showing rejection of higher prices with the implication that price will fall in the near-term. A bullish pin bar signal has a long lower tail, showing rejection of lower prices with the implication that price will rise in the near-term.
How to Trade with Pin Bars
When trading pin bars, there are a few different entry options for traders. The first, and perhaps most popular, is entering the pin bar trade “at market”. That simply means you enter the trade at the current market price.
Note: the pin bar pattern must be closed out before entering the market based on it. Until the bar is closed as a pin bar pattern, it’s not really a pin bar yet.
Another entry option for a pin bar trading signal, is entering on a 50% retrace of the pin bar. In other words, you would wait for price to retrace to about the halfway point of the entire pin bar’s range from high to low, or its “50% level”, where you would have already placed a limit entry order.
A trader can also enter a pin bar signal by using an “on-stop” entry, placed just below the low or above the high of the pin bar.
Here’s an example of what the various pin bar entry options might look like:
Trading Pin Bar Signals in a Trending Market
Trading with the trend is arguably the best way to trade any market. A pin bar entry signal, in a trending market, can offer a very high-probability entry and a good risk to reward scenario.
In the example below, we can see a bullish pin bar signal that formed in the context of an up-trending market. This type of pin bar shows rejection of lower prices (note the long lower tail), so it’s called a “bullish pin bar” since the implication of the rejection reflected in the pin bar is that the bulls will resume pushing price higher…
Trading Pin Bars against the Trend, From Key Chart Levels
When trading a pin bar counter to, or against a dominant trend, it’s widely accepted that a trader should do so from a key chart level of support or resistance. The key level adds extra ‘weight’ to the pin bar pattern, just as it does with counter-trend inside bar patterns. Any time you see a point in the market where price initiated a significant move either up or down, that is a key level to watch for pin bar reversals.
Pin bar Combo Patterns
Pin bars can also be traded in combination with other price action patterns. In the chart below, we can see an inside pin bar combo pattern. This is a pattern in which the inside bar is also a pin bar pattern. These inside pin bar signals work best in trending markets like we see below…
The pattern in the chart below could be considered the ‘opposite’ of the inside-pin bar, it’s an inside bar inside a pin bar signal. It’s relatively common to see an inside bar form within the range of a pin bar pattern. Often, a large breakout move will follow an inside bar formed within a pin bar’s range, for this reason, the pin bar + inside bar combo setup is a very potent price action trading pattern, as we can see in the chart below…
Double Pin Bar Patterns
It is not uncommon to see back-to-back or “double pin bar patterns” from at key levels in the market. These patterns are traded just like a normal pin bar, except they provide a trader with a little more ‘confirmation’ since they reflect two consecutive rejections of a level…
Pin Bar Trading Tips
As a beginning trader, it’s easiest to learn how to trade pin bars in-line with the dominant daily chart trend, or ‘in-line with the trend’. Counter-trend pin bars are a bit trickier and take more time and experience to become proficient at.
Pin bars basically show a reversal in the market, so they are a very good tool for predicting the near-term, and sometimes long-term, direction of price. They often mark major tops or bottoms (turning points) in a market.
Not every pin bar is going to be one worth trading. The best ones occur in strong trends after a retrace to support or resistance within the trend, or from a key chart level of support or resistance.
As a beginner, keep your eyes peeled for daily chart time frame pin bars as well as 4 hour chart time frame pin bars, as they seem to be the most accurate and profitable.
Longer tails on a pin bar indicate a more significant reversal and rejection of price. Thus, long-tailed pin bars tend to be a little higher-probability than their shorter-tailed counter-parts. Long-tailed pin bars also tend to see price retrace to near the pin bar’s 50% level more often than shorter-tailed pins, this means they are typically better candidates for the 50% retrace entry discussed previously.
Pin bars will show up in any market. Be sure you practice identifying and trading them on a demo account before trading them with real money. Practice makes perfect.