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Thread: Could the 1-2-3 Pattern be the Holy Grail?

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  1. #1
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    Question Could the 1-2-3 Pattern be the Holy Grail?

    Hi Everyone,
    I have only just joined but since this isn't cluttered and I haven't found a post on it in the patterns section, I thought I'd start if off!
    I have been trading Forex on & off for a couple of years and although I am profitable, I have only been trading tiny positions and have had great trouble sticking with any one system due to a number of factors - the main one being that I don't want to be dependant on a fixed system which may not work long term but the one thing we can all agree on is that if we look at a chart of any currency or Index, the price never goes up in a solid line, it retraces then continues in EVERY case and so I have decided to make this my mission - Instead of trying to master price action and all the different patterns, I am going to see what I can do to make a workable system from the base foundation of the 1-2-3 Pattern.
    I will start to post up some images in the coming week and will discuss my findings here so we can all benefit from any observations!
    I think the first area is to drill down to which points we should take as the swing highs and swing lows as there are several methods....using fractals, visual swings and TD points which are a type of swing high/low created/found by Tom DeMark.

    I think that'll do for me now....watch this space


  2. #2
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    Hi Stonecold! I'll definitely be watching this space. I have tinkled with DeMark and his number sequences about 3 or so years ago. I'll see what I have on my computer about it as I did have some PDF's on some of his principles.

    Do you have the indicators? I have some of the indicators on my PC I think, from what I remember, PL Dot, TD Sequential. Do you have those? If not I'll try to fish them out and upload them. I remember at the time they were a bit hard to find.

    What trading platform are you using? Do you want to trade manual or quantitatively?

    I know what you mean with not having a fixed systems as one has to remain fluid along with the markets; that's the key. I'd be very interested in exploring some different ideas with you and seeing what works. I've been trading for quite a number of years now and have seen most of the things under the sun, but I would be interested in going back to some of them and applying them.

    You mentioned fractals; it reminded me of Murrey Maths lines. It would also be interesting to look into those, and even how reliable methods such as pivot points are.

    I think if we can find a collection of methods that GENUINELY work by themselves, and then wait for two, three or whatever number of those reasons to enter a trade point in the same direction, that confluence of points could make for a high probability trade.

    Well, I'm looking forward to exploring some ideas with you. I better sleep now: tis late in London!

    Last edited by theMoney; 01-22-2012 at 11:33 PM. Reason: embarrassing typos :o
    I am The Money

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    Smile Checking back!

    Hi Money,

    I didn't mention but I am in the South East of England in a small town in Portsmouth so we should be on the same time zone!
    The only thing I have to be up front with, is that I am disabled and at home with fairly severe health problems but I can get out from time to time etc but one of the problems can be sleep due to the meds so if I don't manage to post as often as I'd like...please forgive me.
    I have had one of those days today and so won't likely post again until tomorrow afternoon evening but hopefully with some content and I have sorted out my photobucket account so I can attach screenshots etc. :-)

    By for now,

    Stonecold


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    Hi Stonecold!

    I should be in bed right now as I'm off to Finland tomorrow until monday, and I'm leaving early in the morning! I found some of those files on my computer, I've attached them for you.

    Sorry to hear about your sickness, I hope you get well. I don't want you feeling pressured to reply to me; take it at your pace, after all, this is your thread, this is your party, this is your BBQ!!



    How long have you been trading?

    Attached Files Attached Files
    I am The Money

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    Stonecold69 (02-27-2012)

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    Links to Previous Screenshots plus reply

    Hi Money and anyone else reading!

    I'm about to start market watching but just wanted to add links to the two photos in my previous post - admin are allowing me to post links since you won't be able to read the text and detail in them!
    Thanks for the reply and I'll do my best to keep adding content - I do have those indicators but thank you very much for the thought! Hope you have a good trip

    Links to Screenshots:

    1. http://i1140.photobucket.com/albums/...tiveMethod.png

    2. http://i1140.photobucket.com/albums/...-3Haggerty.png

    Edit: The Photos still look too small and it may be a photobucket thing so I'll look into it later today after trading!

    That's it for now!

    Stonecold

    Last edited by Stonecold69; 01-26-2012 at 07:25 AM. Reason: Problem with pics

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    Stonecold, very interesting thread. Sorry to be ignorant, but what exactly is a standard 123 and what is The Kevin Haggerty Method. I'm not famliar with either


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    Lightbulb A Couple of Screenshots Showing Newly Found Strategy!

    Hi Everyone,

    I'm not quite sure why but I seem to have 'lost' my last post where I said I would try my best to post frequently but may not be able to due to my health but anyway here's a couple of screenshots I took showing the 'standard' 1-2-3 and another method which I only recently discovered called the 'Kevin Haggerty 123 Method'

    I'll be back tomorrow hopefully
    p.s.
    The pictures wouldn't view properly on here so I have had to use a link to see them - I hope this is ok by the admins as I wouldn't link to any product or site just this is my photo gallery and should allow viewing of the pictures in the correct size!
    Also, unfortunately the chart had moved and I didn't realise it so the numbers are a little offset :-o DOh!
    Here we go...

    1. The Standard 1-2-3

    Click image for larger version. 

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    2. The Kevin Haggerty Method

    Click image for larger version. 

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    Stonecold

    Last edited by Stonecold69; 02-06-2012 at 04:57 PM. Reason: Format Wrong

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  10. #8
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    Hey Guys n' Gals?
    I'd love to continue with this thread but I have done two posts now one of which had a bit of writing and two screenshots and as far as I can tell, the posts have disappeared??? First off I had 'waiting for moderator' and now nothing?
    I'll check back to se eif anyone has a suggestion otherwise I'll have to move to my own blog or something :-o

    Stonecold


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    Hi Stonecold, your previous comment was automatically moderated (into moderation queue) as it had an external link while you have less than 15 posts (to stop spammers).

    In regards to the attachments, you have to upload the images first by clicking "Add Files". Once you've done that, you'll be able to press 'Insert Inline' in the bottom right of the attachments manager. This will add the attachment as you can see above.


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    1-2-3 pattern tutorial

    This is one of my favourite patterns. For those who don't know much about it, have a look below, and enjoy! Cheers Stonecold.

    The 123 chart pattern.
    The 123 pattern is a reversal chart pattern which occurs very frequently and has a very high success ratio.
    123’s occur at the end of trends and swings, and they are an indication of a change in trend. They can also be found within a trading range, and they take place when the directional momentum of a trend is diminishing.

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    In the above illustrated example, we have a typical 123 formation forming at the end of a downtrend.
    Price will make a swing low (point 1), retrace upwards to a swing high (point 2), where a downward correction begins. Price would then form another swing low (point 3), which is higher than the previous low (point 1).
    From this higher swing low (point 3) price then resumes the upward movement, thus confirming the change in the trend. A long trade is then entered when price breaks the previous high formed at point 2.
    Since this is all that the pattern consists of, it is very easy to spot for a confirmation of the change in trend.

    Working of the pattern.

    If we look at the fundamental reason for the forming of this pattern, we can see why it works so well. The unfolding of the pattern step wise, would be as follows -
    • An indication of the change in trend is seen, when price retraces the original down move.
    • Failure to make a new low.
    • Price rallying again from here, creating an anticipation of a reversal.
    • Breach of the previous high, confirming the reversal.
    At this point, everybody is going long creating the extra momentum for the upwards trend.
    This is because trader’s, who had anticipated the downtrend to continue, would have placed their stops above point 2 of this pattern. And when these stops are hit, these breakout traders will tend to cover their positions by going long, driving the price up with thrust.

    Trade parameters.
    Once this pattern has been spotted, let us define some very simple rules for managing the trade.

    Entry - The ideal entry should be taken on the break of the point 2 – the previous high (or low as the case maybe)
    Stop - The stops to be placed beneath the low of point 1. Aggressive traders may even place the stops below the point 3, but it is always better to give price enough room to move without hitting the stops.
    Price targets - While this pattern does not give any projected target, a minimum target can be estimated by the measured move concept.
    Calculate the distance from the point 1 to point 2 in the formation. Add this to the low of point 3, and this should be the minimum distance that price will travel to.
    Some practical points.


    The setup of the entire pattern from point 1 to 3 could take place in 3 bars or as long as 20 bars. But the rules of pattern remain the same.
    A point to keep in mind here is that more the number of bars involved in the setup, bigger should be the move. This is not a fixed rule, but more often not, this concept is followed by the price.

    Allow the pattern to prove itself before entering a trade. If point 3 forms below point 1, the pattern is negated.
    Similarly price has to break the high of point 2 for confirmation.
    There will be times when price will consolidate within the area of points 2 & 3, without giving any indications of the direction. At such times it is better to stay out, till price action confirms a direction.

    Example of the setup - a bearish 123 pattern

    Click image for larger version. 

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    In this example we can see that price was initially in an uptrend. Price then moves down and a simple trend line break will give us the indication of a change of trend. It is here that we label the swing high as point.1 of the formation.
    In this new downtrend, we then have a swing low from where price retraces up again in the direction of the previous uptrend. We label this as point.2 of the formation.
    Now at this point, even though we have the two initial points of the formation, we are not sure if this is a retracement of the uptrend, or a reversal to the downtrend.
    The confirmation comes when price makes a swing high, which is lower than the high of point1 (the point.3). This tells us that price does not have the momentum to break the previous high, thus indicating a change of trend.

    If you notice, we mentioned that it only indicates a change of trend. This could just be a consolidation where price could be pausing before resuming the uptrend again. This is where we wait for the confirmation. As soon as price breaks the low of point.2, we enter the trade.

    As per our conditions, we place our stops above the point.1 of the formation, and estimate the minimum distance that price should go to. As we can see, price easily surpasses the minimum distance, giving a good short trade.

    Example of the setup - a bullish 123 pattern.

    Click image for larger version. 

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    Trend line entry

    An aggressive entry can be taken on the break of a trend line plotted from the point 2 to 3.

    While the profit objectives and the stop levels remain the same, one must apply money management rules to this type of trades, and take partial profits at the initial levels.

    Click image for larger version. 

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    Target zone.

    A pre-defined exit / target of a trade is very important. If one has a fair estimate of the extent of the move, then a trader can apply proper money management principles. One can thus, take profits at certain levels and use trailing stops to reduce the risk.
    Let us define the exit for this pattern by creating a “target zone” with a confluence of 2 different factors.

    1.) The measured move concept.
    2.) Fibonacci Expansions.

    Fibonacci ratios

    Fibonacci ratios are a very popular tool among technical traders and are based on a particular series of numbers identified by mathematician Leonardo Fibonacci in the thirteenth century.
    The Fibonacci sequence of numbers is as follows:
    0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.

    One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number.
    This common relationship between every number in the series is the foundation of the common ratios used in retracement studies.

    The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the golden mean" - is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179. The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819. The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.

    Using the Fibonacci ratios.
    For some reason, these ratios seem to play an important role in the financial markets, just as they do in nature, and can be used to determine critical points that cause price to reverse.

    Price has an uncanny way of respecting Fibonacci ratio’s, often quite precisely. Hence one can use the Fib ratios to ascertain the correct technical levels.

    Price action is never random, and every wave leaves behind the clues for the next move. We can thus, use the previous price action to determine the anticipated price movement.

    A common mis-interpretation of the Fibonacci numbers is that traders tend to use the same Fibonacci ratio for all kinds of situations.

    Just like the different tools in a carpenter’s tool box, each ratio should be used in a particular situation.

    Using these ratios in a proper way gives us a tremendous advantage over the crowd.

    Fibonacci Expansions

    The Fibonacci expansion is a great tool for establishing profit targets.

    It offers a distinct advantage over the other usual fib ratios, since it isn’t as widely used by traders.

    Rather than drawing levels “behind” the market, the fib expansions draw them in “front” of the market.

    In other words, if the market is moving up and making new highs, the standard fib retracements will draw levels BELOW the current price, but the fib expansions will draw levels ABOVE the current price.

    The fib expansions determine where prices could potentially move to. The advantage is that these levels are drawn “front” of the market.

    To draw Fibonacci Expansion targets, we require three swing points. Below is a picture of what Fibonacci Expansion Targets look like:

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    We measure the distance from Point A to Point B. However, we can’t project price targets until Point C has been established. Only when Point C has been formed do we have the necessary three swing points.

    In short, we identify a trend that has started and pulled back, forming Points A and B, and wait for Point C to form.

    Once Point C has formed, we plot the Fibonacci Expansion Tool on Point A, Point B, and Point C.

    The Fibonacci Expansions are ideal for estimating the price objectives of a 1-2-3 pattern.

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    Chart example of a target zone

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    Source:

    Sunil Mangwani
    www.fibforex123.com


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