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Main » Articles » Trading Strategy

1-2-3 Tops and Bottoms

One of the most popular trend reversal patterns are 1-2-3 tops and bottoms. During the formation of 1-2-3 top, the market reaches a new swing high which is marked as Point 1. Then the market corrects lower to Point 2 and rallies again. During this rally new swing high is reached which is lower than the previous one. This high is Point 3 and our 1-2-3 top is completed. The process of 1-2-3 bottom formation is the same as for the 1-2-3 top but the highs are lows and vice versa. The classical way for trading of 1-2-3 formations is to place sell order below the Point 2 for the top or buy order above the Point 2 for the bottom. Protective stop loss is placed usually above/below points 1 or 3 for the top/bottom. We suggest trading the 1-2-3 formations with early entry. You can use the following rules:

Long Position

  1. The price makes new low which is higher than the previous swing low;
  2. We switch on a lower time frame and wait for small congestion to develop (5-10 bars/candles with almost equal highs and lows);
  3. We place a buy order above the highest high of the congestion and protective stop below its lowest low;
  4. When the short position is opened we place limit order according to our money management rules. We suggest closing part of the position when Point 2 of the 1-2-3 top is reached.

Short Position

  1. The price makes new high which is lower than the previous swing high;
  2. We switch on a lower time frame and wait for small congestion to develop (a few bars/candles with almost equal highs and lows);
  3. We place a sell order below the lowest low of the congestion and protective stop above its highest high;
  4. When the short position is opened we place limit order according to our money management rules. We suggest closing part of the position when Point 2 of the 1-2-3 top is reached.

1-2-3 Tops and Bottoms

There are many more recent examples of forex set-ups and 1-2-3 formations in our Forex Blog
Category: Trading Strategy | Added by: forex-market (2009-10-15)
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