What are 1-2-3 patterns?
Readers will have noticed that the posts in this blog to date have been focussed on the trader far more than they have on trading systems. This is for a very good reason which you should all know by now. If not, please read our earlier posts.
This post however is going to introduce some technical analysis and provide some information on identifying 1-2-3 patterns on charts that will help you to trade profitably.
1-2-3 patterns
1-2-3 patterns exist in both short trending as well as long trending stocks and other markets but for the sake of brevity I’m just going to refer to stocks.
As you would be aware, stocks always move in waves. They form peaks as they make highs and troughs (or valleys) as they make lows.
In an up trending stock we will see the general movement of the stock heading upwards, making successively higher peaks, while in a down trending stock we will see it making lower troughs.
Since we know that stocks move in waves, being able to identify a 1-2-3 pattern can assist us to develop a system to trade it.
We start our 1-2-3 on an uptrending market by identifying a trough as our starting point 1. We then identify the peak as our point 2, followed by a retrcement trough which becomes our point 3.
The 1-2-3 pattern is not valid if the point 3 trough is lower than the point 1.
Referring to the chart image below, you can see how the uptrending 1-2-3 has been drawn on the left.
Can you identify the next uptrending 1-2-3 pattern that has not been drawn? (Hint, point 3’s can become point 1’s).
In a falling market we apply the same process but in reverse. Point one is a peak, point two is the trough and point three is the retracement peak which does not go higher than point one.
If the retracement peak moves higher than point one, then the 1-2-3 is no longer valid.
1-2-3 patterns are visible in all time frames, whether on a monthly chart or a one minute chart.
In order to have a valid 1-2-3 pattern, a minimum of three bars is necessary. The first two bars provide the range whilst the third bar gives the retracement (and sometimes even an entry signal).
1-2-3’s can obviously form over several bars as well, but a minimum of three bars is always a prerequisite.
If you haven’t spent time looking for 1-2-3 patterns before, why not start looking for them now to become familiar with them?
Happy Trading
Brian Dibbins
Trade Profitably © 2006 - 2007
27th July 2007
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