What is the 1-2-3 Pattern?
The 1-2-3 pattern is a universal technical analysis model that helps traders identify a potential trend reversal or continuation. This pattern can be used in forex, the stock market, cryptocurrencies, and even in commodity trading, such as gold and oil. The core principle lies in a sequence of three points that form a potential trade entry zone.
The 1-2-3 formation is one of the simplest and most reliable patterns as it does not require complex indicators or deep fundamental analysis. It can be applied in both day trading and scalping or long-term strategies. Due to its simplicity and versatility, the pattern is used by professional traders to identify entry points with a high probability of a successful trade.
How is the 1-2-3 pattern formed? The most important feature is the sequence of price movements:
1️⃣ The price first forms a local extreme – point 1 (a high in a downtrend or a low in an uptrend).
2️⃣ A correction follows, creating point 2, which becomes a key support or resistance level.
3️⃣ Then, the price makes another move, but it does not surpass the previous extreme, forming point 3, which serves as a potential reversal signal.
🔹 Breaking the level of point 2 is the main trading signal that confirms the final market direction.
Why is the 1-2-3 pattern important?
This pattern helps traders avoid premature market entries and filter out false breakouts. Traders use it for trading on various timeframes, from M5 to D1. On lower timeframes, it is ideal for scalping, while on higher ones, it is useful for medium-term and long-term trading.
One key advantage of the 1-2-3 pattern is that it does not require complex indicators such as MACD, Bollinger Bands, or Stochastic. However, it can be combined with volume indicators and support and resistance levels to enhance signal accuracy.
When is the 1-2-3 pattern most effective?
The pattern delivers the best results when:
- It forms after a strong trend, signaling a possible reversal.
- There is an increase in volume at the breakout of point 2, confirming the strength of the movement.
- It aligns with key support or resistance levels.
- It is confirmed by other indicators such as RSI or MACD.
Using this pattern in combination with proper risk management and volume analysis allows traders to identify optimal entry points and increase the percentage of successful trades.
How to Identify the 1-2-3 Pattern on a Chart?
The 1-2-3 pattern is one of the most effective figures in technical analysis, allowing traders to determine potential reversal points and trend continuation. This model follows a clear algorithm and can be applied to both day trading and long-term investments.
How is the 1-2-3 Pattern Formed?
The 1-2-3 formation can be found on any timeframe, from M1 to D1 and beyond. However, the most reliable signals appear on higher timeframes (H1, H4, D1). Let’s break down the key elements:
➊ Point 1 – this is the local price extreme. If the trend is bullish, point 1 is the high; if the trend is bearish, it is the low.
➋ Point 2 – the correction level, which may become a key support or resistance level. At this stage, the price pulls back but does not yet confirm a trend reversal.
➌ Point 3 – the potential reversal zone, but it is crucial that it does not break point 1. If point 3 forms above point 1 (in an uptrend) or below (in a downtrend), it increases the likelihood of a false breakout.
🔥 Key moment: The breakout of point 2 is the main trading signal. It confirms the trend reversal or continuation.
What Are the Signs of a Well-Formed Pattern?
To correctly identify the 1-2-3 model on a chart, traders should consider several important factors:
- The pattern should form at significant support or resistance levels.
- There should be an increase in volume after the breakout of point 2, confirming the validity of the breakout.
- Reversal candlestick patterns may appear at point 3, such as pin bar, engulfing.
- If point 3 forms at Fibonacci levels (38.2%, 50%, 61.8%), this strengthens the signal.
- Additional indicators such as RSI, MACD, or Stochastic can confirm trend weakening.
When Does the 1-2-3 Pattern Provide the Most Reliable Signals?
Not every pattern formation guarantees success. Strong signals appear when:
- The pattern emerges after a prolonged trend, signaling a potential reversal.
- Volume increases during the breakout of point 2, indicating the presence of large market players.
- The pattern forms on higher timeframes (H1, H4, D1) – the higher the timeframe, the more reliable the signal.
- The price confirms the breakout with a retest, reducing the likelihood of a false move.
How to Distinguish a True Pattern from a False One?
Traders need to avoid false signals that could lead to losses. To filter out incorrect formations, they should consider:
- If the price quickly returns to the range after breaking point 2, it may be a false breakout.
- If volume does not increase during the breakout of point 2, it signals trend weakness.
- If point 3 forms too far from point 2, it increases the probability of a complex breakout.
The 1-2-3 pattern is a universal tool for identifying trend reversals or continuations. It is used by both professional traders and beginners because it is easy to interpret and provides clear trading signals. However, to improve accuracy, it should be combined with volume analysis, candlestick patterns, and indicators. Following these rules will help minimize risks and enhance trading efficiency.
Where to Enter a Trade?
The right market entry point is a key factor for successful trading using the 1-2-3 pattern. The main rule is that the trade is opened after the breakout of point 2. Depending on the market direction, the following positions are opened:
- 📈 Long position (BUY): if the price breaks above point 2, confirming an uptrend.
- 📉 Short position (SELL): if the price breaks below point 2, signaling a downtrend.
Main Entry Strategies
Traders use two entry methods when trading the 1-2-3 pattern:
1️⃣ Conservative Entry:
- Wait for a strong candle close beyond point 2.
- Confirm the breakout with increased volume or divergence in RSI, MACD.
- Minimize the risk of a false breakout but may miss part of the move.
2️⃣ Aggressive Entry:
- Open a trade immediately upon touching point 2.
- Possibility to enter the trend earlier, but the risk of a false breakout is higher.
- It is recommended to use a stop-loss at the nearest support or resistance level.
When to Enter a Trade?
The optimal entry depends on market conditions:
🔹 If the breakout is accompanied by increased volume, it confirms the strength of the trend.
🔹 If a reversal candlestick pattern forms at point 3 (such as pin bar or engulfing), it strengthens the signal.
🔹 If the price tests the support or resistance level before breaking out, it provides additional confirmation.
Retest of Point 2 – The Best Entry Opportunity
📌 Often, after a breakout, the price returns to point 2, testing this level. This is called a retest and is one of the best opportunities for entry.
🔥 How to Use a Retest?
- Wait for the price to pull back to point 2.
- Check if confirming candlestick patterns appear (such as pin bar, doji).
- Open a trade with minimal risk – stop-loss can be placed behind point 3.
💡 Advantages of Entering on a Retest:
- Reduces the risk of a false breakout.
- Allows entering at a better price.
- Provides an opportunity to observe price behavior before the final move.
The choice of trade entry timing depends on the trading style and risk level. Conservative entry reduces the likelihood of losses but may miss part of the move. Aggressive entry allows entering earlier but with higher risk. The best option is to wait for a retest of point 2, increasing the chances of a successful trade.
Where to Set Stop-Loss and Take-Profit?
Proper placement of Stop-Loss and Take-Profit levels is one of the key factors for successful trading using the 1-2-3 pattern. These levels help minimize risks and lock in profits at optimal points.
How to Set a Stop-Loss?
A stop-loss should be placed at a level that protects the position from random market fluctuations but does not prematurely stop the trade before the main move. There are several stop placement strategies:
📌 1. Below point 3 (for buys) or above point 3 (for sells).
This is a classic option that reduces the likelihood of exiting the trade too early.
The farther point 3 is from point 2, the higher the probability of a reliable pattern formation.
📌 2. Based on the ATR indicator (Average True Range).
ATR measures an asset’s volatility, helping to place the stop-loss at a safe level.
To set a stop, multiply the current ATR value by a coefficient (usually 1.5–2) and add/subtract from the entry point.
📌 3. Dynamic stop-loss (trailing stop).
Helps protect profits by moving the stop-loss along with the price movement.
Suitable for trending markets but requires active monitoring.
How to Set Take-Profit Correctly?
Take-profit is the level where a trader secures profits. Placement options:
🏆 1. First level – nearest key support or resistance level.
This is the safest option, especially if the pattern forms near strong levels.
🏆 2. Second level – projection of the 1-2-3 pattern height.
Calculated by measuring the distance from point 1 to point 2 and extending it from the breakout point.
This method is often used for long-term targets.
🏆 3. Partial trade closure + trailing stop.
The first portion of the trade is closed at the first target, while the remaining position is managed with a trailing stop.
This reduces risks while allowing traders to capitalize on trend continuation.
Additional Recommendations for Setting Stop-Loss and Take-Profit
- Consider volatility: during high volatility, stop-loss should be placed further away.
- Don’t place the stop-loss too close: otherwise, random fluctuations may stop you out.
- Lock in profits in portions: this allows you to secure part of the profits in case of pullbacks.
The strategy for setting stop-loss and take-profit depends on asset volatility, trading style, and risk tolerance. The optimal approach is a combined strategy – securing part of the profits at nearby levels while managing the remaining portion with a dynamic stop. This allows traders to maximize the potential of the 1-2-3 pattern in trading.
Mistakes When Trading the 1-2-3 Pattern
Despite the simplicity of the 1-2-3 model, traders often make mistakes that lead to unsuccessful trades and losses. Let's examine the most common mistakes and how to avoid them.
Main Mistakes When Entering a Trade
🚨 Entering Before the Breakout of Point 2
One of the most frequent mistakes is premature entry into the market, where a trader tries to anticipate the breakout of point 2. This can lead to a false signal if the price reverses in the opposite direction.
How to Avoid It?
✔ Wait for the candle to close beyond point 2.
✔ Use the retest of the breakout for a more precise entry.
🚨 Ignoring Volume
If volume does not increase during the breakout of point 2, this may indicate a false move. Large players often create fake breakouts to "shake out" the market before the real move.
How to Avoid It?
✔ Monitor volume indicators (Volume, OBV) – increasing volume at the breakout confirms the strength of the signal.
✔ Use additional indicators, such as RSI or MACD, to assess market dynamics.
Misinterpreting the Pattern
🚨 Expecting the "Perfect" Pattern
The market rarely forms perfectly symmetrical models. Many traders miss good opportunities, waiting for an "ideal" 1-2-3 pattern structure.
How to Avoid It?
✔ Understand that minor deviations from the "classic" form are normal.
✔ Analyze the trend structure, not just the pattern shape.
Risk Management Mistakes
🚨 Placing the Stop-Loss Too Close
Setting a stop-loss too close to the entry point leads to frequent stop-outs due to random market fluctuations.
How to Avoid It?
✔ Place the stop-loss below/above point 3 or consider market volatility using ATR (Average True Range).
✔ Use a trailing stop to protect profits in case of a strong move.
How to Minimize Mistakes?
📌 Wait for a confirmation signal before entering.
📌 Always analyze volume and additional indicators.
📌 Set an appropriate stop-loss considering market volatility.
📌 Apply risk management: do not risk more than 1-2% of your deposit per trade.
Understanding these mistakes and avoiding them significantly increases the chances of successful trading with the 1-2-3 pattern. Following a trading plan, controlling emotions, and proper capital management will help traders minimize risks and improve trading efficiency.
Conclusion
The 1-2-3 pattern is a universal technical analysis tool used to identify entry and exit points in both trend-following and counter-trend trading. It helps traders spot potential market reversals or confirm the continuation of an existing trend.
Key Rules for Successful Trading with the 1-2-3 Pattern:
🔹 Entry point: the best time to enter a trade is the breakout of point 2.
🔹 Filtering false signals: using volume and indicators to confirm the breakout.
🔹 Risk management: placing a stop-loss below/above point 3 or calculating it based on ATR.
🔹 Optimal exit strategy: taking profit in portions or using a trailing stop.
Who Can Benefit from the 1-2-3 Pattern?
This pattern is useful for both beginner traders and experienced investors, because:
- It provides clear visual signals.
- It allows for risk minimization with proper stop-loss placement.
- It is applicable in short-term, medium-term, and long-term trading.
Recommendations
- Do not rush your entry: always wait for confirmation of the breakout at point 2.
- Use a combination of signals: volume, candlestick patterns, and indicators help avoid false moves.
- Practice on a demo account: test your strategy without risk before moving to the real market.
- Follow a trading plan: strict adherence to risk management rules increases the percentage of profitable trades.
The 1-2-3 pattern is a powerful tool that, when used correctly, helps traders earn consistently and reduce the number of losing trades. Incorporate it into your strategy, test different settings, and monitor market conditions to achieve the best results!
