The 1-2-3 Pattern and its Elliott Wave Connection

1-2-3 Pattern as part of an Elliott WaveWhile the 1-2-3 Set-up Pattern can be seen on any chart and time frame knowing where the currency is in the Elliott Wave sequence will make your 1-2-3 trades more consistently profitable.

 

The 1-2-3 pattern is a common occurrence in the FOREX market. There are two variations: the 1-2-3 Buy Set-up and the 1-2-3 Sell Set-up. First, lets talk in terms of the 1-2-3- Buy and later I will show both on an Elliott Wave chart (diagram 3).

The 1-2-3 Buy Set-up

The FOREX price chart (diagram 1) shows price on the vertical axis and time on the horizontal axis. When we speak of #1 we are referring to the price level of the currency at the swing low point. Similarly, you see price points for #2 and #3. A 1-2-3 Buy Set-Up is where #2 is higher than #1 which means the market appears to be going up. Price point #3 is lower than #2 yet NEVER goes below the price of point #1. So, the price territory of point #3 is anywhere between point #1 and #2. If the price goes below the the price of point #1 the pattern becomes invalid. This is consistent with an Elliott Wave Rule. And, when the rising price crosses the line at the price level of #2 it’s time to Buy.


Diagram 1

 The Basic Elliott Wave 8-Wave Sequence

The following chart illustrates the basic Elliott Wave pattern. Notice how Diagram 1, above, resembles waves 1 and 2 and the start of wave 3 on the Elliott Wave numbered diagram 2 below. Notice that the numbering is different in the two diagrams. Diagram 2 is numbered in terms of the Elliott Wave Sequence and Diagram 1 is numbered in terms of the 1-2-3 pattern. I did not want to superimpose the numbering systems to avoid confusion.

Elliott Wave Rule: “Wave 2 never goes beyond the start of Wave 1.”

 1-2-3 Buy and Sell Set-ups

Diagram 3, below, illustrates the Elliott Wave 8-Wave Sequence, yet with the 1-2-3 numbering instead of the Elliott Wave numbering system. The purple sub-waves are called fractals and are described my post “Elliott Waves – Patterns in Chaos.”

Diagram 3

 Profit Target in the 1-2-3 Set-up

To determine your likely profit target simply measure the distance between point #1 and point #2. Then,  from the start of point #3 project that distance upward. In the Elliott Wave Principle this is called “Equality.”

Summary of The 1-2-3 Pattern and its Elliott Wave Connection

While 1-2-3 set-ups are very common on price charts so are Elliott Wave patterns. When traders see the 1-2-3 pattern in terms of the Elliott Wave sequence (the bigger picture)  this set-up becomes more understandable and more profitable.

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