Finally, A Simple Trading Method that helps You Spot High Probability Market Reversal Set Ups in Three Simple Steps. Lesson 1.
What you will learn in this series:
- What is the 1-2-3 Pattern and how to quickly spot it. (They are everywhere on all charts and time frames.)
- Where can you find the Highest Probability 1-2-3 Patterns?
- What to expect for minimum price targets
- Variations in Set-ups
- 1-2-3 Patterns in Impulsive and Corrective Elliott Waves
- How to distinguish between Impulsive and Corrective Waves
- Technical Indicators that can be useful in identifying the “Good” ones
- Entry and Exit Strategies
Rules for The 1-2-3 UP Pattern
- Point 1: A low point in a down trend
- Point 2: An upward correction in the down trend. Point 2 is the highest candlestick in the correction before price moves down to point 3.
- Point 3: The low in the move down from point 2. According to Elliott Wave Rules, point 3 should never make a lower low – lower than point 1. So, point 3 will be between the price territories of Points 1 & 2. (Later we will discuss some exceptions to this rule.) After Point 3 makes its low it reverses and moves up. When it exceeds the price level of Point 2 (makes a higher high) that becomes a valid Entry point.
Rules for The 1-2-3 DOWN Pattern
- Point 1: The high point in a up trend
- Point 2: An downward correction in the up trend. Point 2 is the lowest candlestick in the correction before price moves back to point 3.
- Point 3: The high in the move up from point 2. According to Elliott Wave Rules, point 3 should never make a higher high – higher than point 1. So, point 3 will be between the price territories of Points 1 & 2. (Later we will discuss some exceptions to this rule.) After Point 3 makes its high it reverses and moves down. When it exceeds the price level of Point 2 (makes a lower low) that becomes a valid Entry point.
All 1-2-3 Patterns are not created equal
As you search for 1-2-3 Patterns you will learn to find them very easily. You will also find that they are not all created equal. While some result in massive reversals others barely break even. There is a good reason for that. It has to do with whether they occur in Impulsive or Corrective waves. (An upcoming topic) For now, it’s important that you just learn to spot them all over your chart. Later, we will talk about where you can find the best ones. Meanwhile, here are some examples of the variable quality of the pattern.
The Good: Here is a “Good” 1-2-3 pattern at the start of an uptrend. You will learn, later, that this is part of an “Impulsive” Wave.
The Bad: This 1-2-3 is not very productive because it is part of a “Corrective” Wave sequence. More about that later.
The Ugly: Here is another 1-2-3 embedded within a Corrective Sequence. In a future post you will learn how to distinguish between Impulsive and Corrective Wave Patterns. That will enable you to more easily trade the 1-2-3s that have higher profit potential.
Where can you find 1-2-3 Patterns?
Because of how and why they are formed you will find them on every chart and on every time frame. When you learn that they are part of a bigger picture- which is the Elliott Wave Sequence you will understand them better.
NOTE: PLEASE RELAX! If you have looked into Elliott Wave Analysis you may have noticed that it can be complicated and maybe even confusing. Although this may be true, the basics are very simple. And, you can learn to trade, using the basics, without becoming an Elliott Wave Analyst.
- Do some Back Testing. Pull up a chart of any currency on any time frame.
- Insert a horizontal line on the screen. A friend of mine always used a Blue line. He said “I use Blue because it rhymes with 2.”
- Move that horizontal line up and down on the chart and place it at point 2 of the 1-2-3 pattern.
- That line will mark the “Entry” point. When price action crosses that line it is a valid entry.
- Practice finding them. Let your eyes learn to spot them.
What’s Next? Upcoming lessons will include:
- Using a popular indicator, as a filter, to identify the higher probability 1-2-3 patterns
- What to expect as a minimum price target
- How to set up your chart with two moving averages that will literally mark the spot of where the best 1-2-3 Patterns often occur.
- The Elliott Wave basics that can help you to anticipate profitable 1-2-3 Patterns.