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 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: