If you trade the 1-2-3 Pattern, as you learned it, you may have missed a lot of Great Trades. It has to do with a Potential Flaw in the Practical Application of Elliott Wave Theory.
The 1-2-3 Pattern, as we have been taught, may be flawed.
Those who have studied the 1-2-3 Pattern have been told that Point 3 can NEVER Retrace Lower than Point 1 in an Up Trend and NEVER Retrace Higher than Point 1 in a Down Trend. We have been taught that if it happens “All bets are off.” and “The 1-2-3 Pattern becomes invalid.” However, if you look at a lot of charts you will find that this Rule is often broken.
I recently became aware of this as I prepared the Training for a New Trading Methodology I am introducing- called The 1-2-3 Tunnel Method. By observing years of charts, using historical data, I observed that quite often Excellent Trades were initiated by “Invalid” 1-2-3 Patterns.
The following Diagram illustrates how the traditional 1-2-3 Pattern is being taught:
A Potential Flaw in the Practical Application of Elliott Wave Theory
The Popular 1-2-3 Pattern is firmly based in Elliott Wave Theory. The reason why we have been taught that Point 3 can NEVER retrace beyond Point 1 is because, in Elliott Wave Theory, Wave 2 can NEVER retrace beyond the origin of Wave 1 (beyond 100% of Wave 1). If this Primary Rule of Elliott Waves is violated the Wave Pattern is said to become invalid.
The following chart illustrates the 1-2-3 Pattern from the Elliott Wave perspective. It illustrates that the 1-2-3 Pattern is really Elliott Waves 1 and 2. When the trendline is crossed the presence of Wave 3 price action is confirmed. In The 1-2-3 Tunnel Method Training you will be shown how to confirm Wave 3 action in “Invalid” 1-2-3 Patterns.
However, in practice I have observed numerous very large trends that started with an “Invalid” Elliott Wave count or an “Invalid” 1-2-3 Pattern. Just yesterday, while talking with Jeffrey Kennedy (Elliottician, Elliott Wave Analyst, Professor of Technical Analysis at Georgia Tech University and Elliott Wave International Instructor) I asked him about my numerous observations of “Invalid” Wave counts resulting in strong trends. He said he has also noticed it. He summarized it by saying, “Welcome to the real world.” He went on to say that theories, taught in academia, sometimes do not play out exactly as they are taught.
The following screen shot illustrates one example of an “Invalid” 1-2-3 Pattern that resulted in a
very profitable uptrend.
We discussed how the 1-2-3 Pattern has its foundation in Elliott Waves. We also found that the way we have learned to spot the pattern may be flawed because often “Invalid” patterns result in great trades.