You will need to be familiar with identifying chart price trend like uptrend and downtrend to better recognize a 1-2-3 chart trading pattern.
Courtesy of TopForexRating and FxTradingPro, who brought this up.
The basic chart pattern of an uptrend is a series of higher high and higher low and for downtrend a series of lower high and lower low.
The 1-2-3 chart trading pattern is a reversal chart pattern; therefore you will need to have an established trend, whether uptrend or downtrend to have a valid 1-2-3 pattern. It will be easier for you if you can easily spot a trend since the 1-2-3 chart pattern appears near the end of the trend or when the trend start to lose steam and starting moving sideways.
1-2-3 chart trading pattern start after an uptrend or downtrend pauses and stop registering higher high or lower low in an uptrend and downtrend respectively. First step is draw a horizontal line connecting the recent high before the failed higher high and connecting the recent lows. Once the sideway trading range is set and established using the two horizontal line you should start marking the 1-2-3 points in the chart.
Mark number “1″ the recent high before the failed higher high and mark the next low as number “2″ and lastly the failed high should be marked as number “3″. This is the same for the steps in a downtrend and this is the main component of the 1-2-3 chart trading pattern.
The trading signal will be generated once the price moves below or above the price leveled as “2″. If the price moves and breaks the recent low leveled as “2″ in an uptrend this is a sell signal. While if the price moves and breaks the recent high leveled as “2″ in a downtrend this is a buy signal. It is best if you will consider the current oscillator signal and direction as an added confirmation to the 1-2-3 chart pattern trade.
Your price target will be on the next Fibonacci levels or MAs or better yet a established support or resistance level and because this is a quick trade you should be profitable in the next few minutes and you should quickly move your stop loss to break even or exit the trade if still not on the green zone after a few minutes. You can use this in the hourly time frame down to the one minute chart of course the higher the time the higher its reliability.
This pattern is not cast in stone and can some time result to false break out, always trade with a good risk reward ratio, this will make you profitable over the long term. Practice makes perfect, that is why you will need to practice trading any pattern you put into your trading arsenal, once you get familiar with the nature of a pattern you start to understand how it moves, how it behave and you start to have a deeper understanding on the psychology behind the trading pattern and start to take advantage of the opportunity presented to you by such trading patterns.