1-2-3 Reversal Pattern Strategy

The 1-2-3 reversal setup is a basic formation on the chart, which warns about
the next reversal of a trend.

Settings

The 1-2-3 chart pattern is a three-wave formation, where each movement reaches a pivot point. This is where the name of the pattern comes from, the 1-2-3 pivot points.

This is what the pattern looks like:

The 1-2-3 pattern works in both directions. In the first case, a bullish trend becomes a bearish one. And the second image presents the opposite, a bearish trend becomes a bullish one.

1-2-3 chart pattern structure

The pattern appears after three price movements, which form three pivot points and one level
confirmation.

Pivot point 1.
It is an inflection point where the price formed during a trend. If the price breaks the
previous trend line after pivot point 1 formed, the pattern will be more reliable.

Pivot point 2.
The next turning point is very likely to form outside the previous trend line
or channel. This is a good indication that the trend could be ready to end and
reverse.

Pivot point 3.
Pivot Point 3 is crucial for 1-2-3 reversal chart patterns. The point must not exceed the
pivot point 1 (in the worst case, it could be at the same level) for the pattern to be
valid.

Confirmation Level
The confirmation level is our entry point into the market. It is located on the same level
than the pivot point 2. When the price exceeds this level, open the trade.

Target level

To set the target, the trader must connect pivot points 1 and 3 with a line. The size of your 1-2-3 pattern is equal to the vertical distance between Line 2 (which is a horizontal line at the level of pivot point 2) and the midpoint of Line 1.

Setting the Stop Loss of the 1-2-3 chart pattern

It is very important to use Stop Loss when trading the 1-2-3 chart pattern. The SL should be set below pivot point 3 in an uptrend reversal, and above it in a downtrend. In a high market volatility condition, the price could be pushed beyond pivot point 2 for a while. This is why it will be a good idea to set the SL a little further than pivot point 3, as this will prevent it from activating.

Setting the 1-2-3 continuation pattern

The 1-2-3 pattern can also work as a continuation pattern. In other words, it could give
a sign that the trend will not reverse.

In this case, the price does not break the “confirmation level” at pivot point 2. On the contrary,
it returns to the level of pivot point 3 and breaks it. This setup gives a signal that the trend
to be continue.

Stop Loss in the formation of continuation patterns
If you are trading the 1-2-3 pattern as a continuation formation, then your Stop order
Loss must go beyond pivot point 2.

Target level of continuation pattern 1-2-3

The “1-2-3 continuation pattern” goal measures in the same way as usual. The
The only exception is that, in this case, you must take pivot point 3 as the starting point of your
aim.

Example

If you had known about the 1-2-3 pattern in May 2021. It would have been the best short trade ever! Let’s look at the perfect example of this pattern!

Bitcoin daily chart

After the Bitcoin chart formed Pivot Point 1, the price fell behind the trend line, where Pivot Point 2 occurred. Then, the price recovered and Pivot Point 3 and a potential Stop Loss level appeared. . After the price broke the confirmation level, it went down and reached the target pattern.

Conclusion

The 1-2-3 pattern is a common pattern that usually appears at the beginning of many price reversals. Sometimes, it can also give a signal about the continuation of a trend. For higher quality signals, it is best to use the 1-2-3 pattern in tandem with an oscillator (e.g. RSI). At extreme RSI times, the 1-2-3 pattern will provide the most accurate signals.