Why make things complicated when they can be easy? In trading, a lot of people have a tendency to overcomplicate simple concepts. Sure, some of the concepts in trading are not the sort of things you would intuitively know. But many things actually are fairly easy; you just have to know what to look for.
Imagine a forex trading strategy where all you need to look at is the price itself, and you need it to fulfill 3 simple criteria. Meet the 1-2-3 pattern, sometimes also known as the A-B-C pattern.
The 1-2-3 pattern is indeed one of the simplest chart patterns you can trade, and I’m going to tell you what it consists of right now: a low, a higher high, and a higher low. That’s all there is to it! Sounds easy?
Here is an example on the EUR/USD currency pair:
The red circles on the chart represent point 1, 2, and 3, respectively. The first thing you may have noticed here is that we used a line chart to represent the price instead of the candlestick charts we typically use in trading. Most charting software packages have the option of choosing between many different chart types, so you can easily switch between these two representations. A line chart simply makes it easier to spot the 1-2-3 pattern because we remove so much of the clutter on our chart. In this case, you will want to keep your chart as clean as possible so you can focus on what’s important.
The idea of the 1-2-3 strategy is that you enter you buy order after point 3, just as the price passes through the price level from point 2, as indicated by the red horizontal line.
The stop-loss will usually be placed just below point 3, and the target price can be determined in a few different ways depending on your own preference. Some use Fibonacci extensions, while others look for the next natural resistance level. The optimal choice here is beyond the scope of this post, but I encourage you to try to find a target price rule you feel comfortable with.
The logic behind why the 1-2-3 pattern works is really one of the most basic concepts in technical analysis and the art of reading charts. If you remember how an uptrend is defined, you are already on the right track.
An uptrend is defined as a series of higher highs and higher lows in a wave-like pattern. A 1-2-3 pattern is, hold on(!), a low, followed by a high, followed by a higher low. It is, in other words, it’s the beginning of a new uptrend on the chart.
So there you have it, the 1-2-3 pattern. It is one of the simplest, yet most powerful patterns in traditional “price action” trading. Different traders will have different opinions on where exactly the best place to enter, place a stop, or place a target is, so I encourage you to go over your charts and do some visual backtesting for yourself on what works best for you.