blacksauron (02-04-2012), Stonecold69 (02-28-2012)
I read this with great contentment! As I was reading I felt myself saying, 'Yea. YEA!! I see. I like the look of this'.
For an entry level (as per your example above), would we be looking to put a sell stop about 10 or so pips below the support level 2?
What time frame do you think this is best on?
Have you done any back testing on this? If there was an EA which is accurate in identifying this pattern, one could back test years very quickly, experimenting with different take profit ratios, stop loss levels and also the average win probability %. Have you had any experience with back testing or forward testing it?
I do like it as it's simple. K.I.S.S as they say...!
Hanna
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.
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
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.
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.
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:
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.
Chart example of a target zone
Source:
Sunil Mangwani
www.fibforex123.com
blacksauron (02-04-2012), Stonecold69 (02-28-2012)
Stonecold69 (02-28-2012)
Hi Everyone!,
Thanks UncleBuck for such a great post, well post(s) - I really like the detailed and colourful explanations of the patterns and it goes a long way to helping people learn this great method but I feel that the aim of my initial Thread is to go into the strategy and really look at how we can exploit it for maximum gain with minimum risk....
I have done several trades over the last two days and have also captured many examples of the 1-2-3 pattern in many of its variations such as 'zig-zag' 'steps' and such....
I did start a long post which got wiped out by a refresh event but I wanted to let you all know that I plan a few super-posts between now and the weekend or at least Saturday...
Before I shoot off I shall list the areas I think we can 'drill down on' and really look for the best methods - I have mentioned the Kevin Haggerty strategy and this is quickly looking like the holy grail to me as it performs flawlessy...well, nearly
I shall be finding info to post on this as well and I will show how it really outperforms the standard 1-2-3 strategy for profits and indeed risk but here's the list which I plan to work my way through with the help of you guys wherever you have ideas or experience!
Whilst I don't want to be funny about it, I have a total dislike for any automated strategy as the entries for these methods can be highly subjective and whilst I truly believe that anyone can learn how to spot these patterns and exploit them for profit, the way we interpret what we see and how we see it is far too complex to code into a set of instructions....for an EA
I say the latter with experience as I can code both EA's and Indicators but I'd prefer it if we kept to manual trading as I believe the EA route will be at best 'slightly profitable' and quite possibly break-even to losing...
What will be great is if everyone who has an indicator that shows 1-2-3's A-B-C's or any form of 1-2-3 pattern, posts it in this thread so we can all have a look and try them out - At the moment, the ones shared are very good but there is an excellent one over at forexfactory which is free and coded by one of their members....I hope he won't mind my posting it as I am giving credit to them....
The indicator has many features including alerts, targets and breaks.....
Please note that I personally think we will be moving away from the 'standard 1-2-3' and fine-tuning it into a highly profitable, lower risk method.
Before I post the indicator, here are the areas that I plan on investigating for their impact and usefulness....
1. Overall Trend - Both at Traded Timeframe and Higher/Lower
2. Significance of Spike-Highs and Spike-Lows
3. Angle of Retracement forming Pivot [1]
4. Angle of Pivot [2] to [3]
5. Size of Stop from Break of Pivot [1] to High/Low of Pivot [2]
6. Relationship between (5 above) and Profit Taking.
7. Should we set Profit Targets or should we be letting the trade run - after all, in a good trend the possibility is quite good that it continues on!! This also relates to point (1.)
8. Pivot Levels as calculated normally and Fibonacci Pivot levels and also Fibonacci Retracement Levels.
9. Use of Various Moving Averages to Assist in strength of trade assessment
10. Use of Oscilators such as RSI in determining strength of trade.
11. Scaleability of method from Lower Timeframes to Higher ones....
12. Using mt4 tools (or your platform's) to assist in the analysis and finding of trades...
13. Placement of Stop - Conventional is a few pips from/on pivot [2]'s low/high but is this the safest &/or does this give the trade the best chance of success... (Kevin Haggerty comes to mind and will be explained soon enough ;¬) )
14. Pivot or Swing High/Low definition - Think Fractal and Tom Demark, which is best?
15. Duration of pattern formation - over how many candles has the 1-2-3 pattern developed and is there a relationship between strength of trade and number of candles?
I'm sure I will think of more as I am kinda crazy and really want to 'solve the market equation' but the above are definitely enough for now!
Thanks to all posters so far - let's make this a real winner!
p.s. All credit for indicator 123PatternsV6.ex4 & 123Alarms.ex4 to Robert Dee at forexfactory
123PatternsV6.ex4
123Alarms.ex4
Last edited by Stonecold69; 02-02-2012 at 05:59 PM. Reason: forgot to attach indicator doh!
MissPips (02-03-2012)
I don't mean to jump on this thread, but I just wanted to let you guys know that I'm following it with a close eye.
Nice set of points to go with the indicator here - Looking forward to more
Hi Stonecold,
What an awesome post. I've been trying to read up on the Kevin Haggerty method. I can't find any information on it apart from on his website. He is offering a course which is currently $795 which is quite a lot.
In your list of 15 points of exploration, let's take point 1. for example (Overall Trend - Both at Traded Timeframe and Higher/Lower); Are you talking about exploring the usefulness of establishing an overall trend, as to determine whether it creates an 'edge', or do you mean you're looking to use the 123 method to determine the trend?
Have you got the Kevin Haggerty course yourself? How do you know so much about it?
Below is the indicator which you attached last time. It looks quite applicable (i.e. an indicator which actually looks useful).
On a side note; I tried installing this on my normal broker which is FXDD and it came up with a big error box when I added the 123PatternsV6.ex4 to the chart. It then crashed my meta trader. Afterwards, I tried Alpari and it crashed Alpari. I then tried downloading IBFX which uncle buck recommended and it worked on there... Has anybody else had problems with this or is it just me or something I'm doing.
Last edited by MissPips; 02-03-2012 at 09:54 AM.
Deja Moo: The feeling that you've heard this bull before.
Hi MissPips,
Thanks for the kind words - I'm not stopping long but I thought I'd answer a couple of your questions!
Ok, so before I go onto the 'method/trend' question, I have only used the indicator with GKFX & their Platform when they were Smartlivemarkets and also on both ALpari and AxiTrader.....hold on I can't swear on the Alpari - but def. AxiTrader and The two GKFX mt4's so it's unclear unless others comment on whether they too are having issues....
I can try it over the next few days on Alpari and see how it goes - here's something for you to try though... Make sure the mt4 is the latest build and maybe check the build of the platform it works on by going to Help then choose About and you should get something like :
If the one which crashed is lower then there is the problem! Also, the Alarms one needs the other as it is an add-on not an indicator on it's own...I forgot to mention that! Doh!
Now onto the other question...
I did, as you figured, mean to look at the other timeframes to get an overall view of the trend - Also, some people say go to higher timeframe for trend and a few say go to lower and this is interesting because whilst I can see how the higher time frame is like a 'bird's eye view' and therefore possibly more useful....WHEN the trend does change, where does it happen first?? Yep, on the M1 and then the M5 and so on and so forth... so it will be interesting to see if we can find some kind of formula or synergistic relationship between the timeframes to reinforce our trades.
Lastly the Kevin Haggerty method.... Yes I managed to find a copy of his course and I will see what I can do to find the links although I will be explaining the method in as clearer fashion as possible and will, of course, answer any questions!
Hope everyone is enjoying the start of the weekend and have had a constructive week's trading
Stonecold
Hi Everyone,
Just wanted to quickly post an apology as my health was playing up over the weekend and I didn't get to do my 'super-post' - I shall endeavour to make useful posts in the coming week and then hopefully something a bit more in-depth next weekend :-)
Oh my goodness, Stonecold! You need to be putting your health first, that's the most important thing. So don't worry about not being able to post; when you're feeling up for it, then you can post, but put yourself first I certainly have been checking back every day to gobble up more knowledge from you. I'm especially intrigued by the Kevin Haggerty method, as I searched for it everywhere and found very little information on it.
I totally agree with you on the time frames. Most of the price movement threads I have read up on have concentrated on trading higher time frames, 4H+, but as you said, the changes start at 1 min, 5 mins, 15 mins, and so on. Therefore, to catch a move before it reaches full fruition I believe one would have to target a lower time frame, whilst also keeping an eye on the 'birdseye view' to keep an overall perspective.
I'm not an expert in the foreign exchange market by any stretch of the imagination, but I am profitable in what I do. I trade 5 minute charts at the moment, using price movement, fibonacci, stochastic, chart and candlestick patterns. I've just focused on these and have got good it.
But I do think, by scanning over the methods briefly, that the 123 and the Kevin Haggerty that if one focus's on them and becomes an expert at them, then one could have a market edge and truly master the markets by using them.
I'm looking forward to your super post
(It sucks when you lose a post or email when you refresh I tend to, out of habit keep copying the text so it doesn't get lost, as I've had lots of bad experiences over the years!).
Jennifer
Deja Moo: The feeling that you've heard this bull before.
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