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-   -   How to use the 123 strategy effectively (https://www.forexfactory.com/showthread.php?t=232466)

Paulus Sep 16, 2010 8:31am | Post# 21

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Hey there everyone,

What is the best way to use the 123 system, in terms of entry, exit, take profit and stop loss?

I think the 123 strategy is a great system but I cannot seem to make a steady profit with it, I keep losing as much trades as I win, and sometimes lose more than I win.

Would appreciate it if anyone can help out this noob

Thanks!
Hi saidar

You have to keep this type of system clean and simple the 123 pattern is based on the phycological reactions of traders to other traders

Simple explanation..

The 123 long

We have a low at 1 we then have buying to a high at 2 and then a selling off down to 3 BUT the 3 makes a higher low than the 1..buyers stepped in and bought before a lower low was created and continued the down trend ..this is your 123 low formation.

The target level of your entry on this type of trading has to be 2 to 3 times the size of your stop

The way I do is simple and conservative take the low at 3 at the entry point this is your risk on the trade...just transpose the level in fornt of your entry to get 100% 200% 300% etc etc you can go on as long as you like untill your stopped

Moving of SL

When you hit 100% move SL to entry..when you hit 200% move SL tp 100% level etc etc

here is example followed by actual chart example the last signals is still live and stop would of been moved to break even 2 hours ago.. 4 signals since beg sept on this 1 swap on a 1 hour chart for a gain of around

1st signal 150 pips RR 7:1
2nd signal 235 pips reversed into short RR 3.5:1
3rd signal lost 42 pips
4 signal still live 100% hit so SL now at break even



cheers

Paulus
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Paulus Sep 16, 2010 12:13pm | Post# 22

15min usd will keep this updated
 
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Paulus
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Paulus Sep 16, 2010 7:02pm | Post# 23

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I have 2 and 3 in place a break of 2 will see the short open

P
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Paulus Sep 17, 2010 6:45am | Post# 24

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updated chart fail on the 15min EURUSD for - 27pips

but in again and looking good

here are the charts
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Paulus Sep 17, 2010 9:09am | Post# 25

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update on entries.. EU 1 hour new count 1 in place
GU 1 hour new count 1 in place
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Paulus Sep 18, 2010 1:01pm | Post# 26

usdcad
 
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These 2 counts were the only 2 formation on Friday on this swap I have inc the 5 min and the 15 min which both confirm

The bottom charts shows how zig zag can help with the counts

P
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bigjim1958 Sep 19, 2010 12:18am | Post# 27

Actively trading?
 
Hi Paulus:
Great to see you contributing to this thread. Can I ask are you actively trading this strategy the way you outline here and if you are, have you been successful. I've talked with Golferguy about how he trades, he's been successful, but has variations that I guess I'm just not smart enough to follow. Was hoping someone was successful just using this system in it's basic form. Thanks for your time.

Jim

Paulus Sep 19, 2010 5:38am | Post# 28

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yes I trade this for a few good reasons

 

  1. Very good risk reward on winning trades
  2. Once point 3 has been identified a lmt buy or sell can be placed and I can walk away or at least relax and do something else
  3. The idea behind it is pure supply and demand .. I know why its happening not that a stoch is just OB or OS
  4. Can be used on any time frame from 5min up

The most important things I have found is that it has to be used to find reversals and new trends ..not as a continuation pattern to take a long or short in an existing trend.The main reason is that we dont know how long a trend will last ie..we take on long reversal on a 123 pattern and our TP gets hit.If we re enter the trend with another 123 in the same direction it could last 2min then end..

I prefer to enter a new trend nice and early if long and we exit I look for short etc etc..my trades will always go long short long short etc etc

The count is the most important thing here..set up 3 number 1 2 3 and just leave them on your chart in a corner soon as you see a high in an up trend mark it 1 the price moves down makes a bottom and moves up mark the bottom 2..now dont forget 3 has to be lower than 1 for a short...if we get a high which is lower than 1 and price moves down we set a lmt sell at 1pip below 2 ..if price doesn't get triggered and makes a high higher than 3 we remove all numbers and start the count again

Follow that chart from A if you follow this procedure it gives you an excellent chance of spotting 123 reversals on any time frame..the risk on the short was from entry at the broken level of 2 to the high of 3 around 24 pips ...results gave us 2:1 on this trade

never enter on a gap up or down on a monday..ie we have our 123 and looking for level 2 to be broken for a long..we get a gap up open on Monday...do not trade this...its unreliable

To gauge the required pull back or rally to create the 2 point use 61.8 fib I will show this on another chart

P
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Paulus Sep 19, 2010 5:56am | Post# 29

daily signals
 
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The chart you see here is accurate and counts accurate..yellow boxes are exit points the 1st long was reversed into short 123 before any SL was hit

P
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Paulus Sep 19, 2010 6:12am | Post# 30

NO ENTRY
 
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Rules for gap up Monday using daily charts
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Paulus Sep 19, 2010 6:45am | Post# 31

To put 3 in place
 
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We need a strongish pull back or rally I use 61.8% to gauge this

P
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blueskies Sep 20, 2010 2:18am | Post# 32

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Hi, a few quick questions, hopefully you can share your views. Sincere thanks in advance!

(1) Do you find 1-2-3 pattern on all timeframes equally likely to result in winning trades? Or do you find certain timeframe(s) more likely to lead to winning trades?

(2) Please see attached gif file, which is a chart you have uploaded. I have added two lines and a question in the chart.

(3) Do you place importance in the distance between Points 1 and 2? For example, "they must be at least X pips apart".

(4) You mentioned "We need a strongish pull back or rally I use 61.8% to gauge this". Does this mean if the distance between Points 2 and 3 is less than 61.8% of the distance between Points 1 and 2, then you do NOT consider this as a valid 1-2-3 setup?

(5) Lastly, do you care about hours of the session when the 1-2-3 setup occurs? Let's say on a 15-Min chart, a setup occurs after US close when trading activity has slowed significantly, do you believe this setup is just as good as one that occurs during London session?

Once again, thanks for you sharing of knowledge.


yes I trade this for a few good reasons
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Paulus Sep 20, 2010 12:51pm | Post# 33

(1) Do you find 1-2-3 pattern on all timeframes equally likely to result in winning trades? Or do you find certain timeframe(s) more likely to lead to winning trades?
I have found most time frames reliable apart from the 1min which has to many signals and is difficult to determine where our trend is..

(2) Please see attached gif file, which is a chart you have uploaded. I have added two lines and a question in the chart.

I like more than one green candle from the move 2 to 3 or more than one red candle down to 3 other wise signals appear all over the place a doji is fine but red green red for a 123 set up is way to fine

(3) Do you place importance in the distance between Points 1 and 2? For example, "they must be at least X pips apart"...No as long as it satisfies the simple Fib trteracement

(4) You mentioned "We need a strongish pull back or rally I use 61.8% to gauge this". Does this mean if the distance between Points 2 and 3 is less than 61.8% of the distance between Points 1 and 2, then you do NOT consider this as a valid 1-2-3 setup?..correct it is not valid it may retrace more later

(5) Lastly, do you care about hours of the session when the 1-2-3 setup occurs? Let's say on a 15-Min chart, a setup occurs after US close when trading activity has slowed significantly, do you believe this setup is just as good as one that occurs during London session?
No..any set up that happens within UK open and US close is deemed more reliable purely for the fact there is more volatility ..in low periods of volatility the setup are more current

hope that helps

P

Paulus Sep 20, 2010 1:12pm | Post# 34

xample of waiting for retracement
 
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here is a good example of the need to wait for the retracement to 61.8% and at least 2 up candles

On the screen shot of today on $ you could place your 2 at A initially with your 3 at B This would of resulted in a losing trade..

reason why not to take this signal even though 61.8 was hit

 

  1. Only 1 UP candle from A to B we need a min of 2 Doji's are ok

result we wait.. Price make s lower low we move our 2 to this position and move down our Fib line to 2 ...we get a gap up this morning thats ok as it wasn't the trigger in..it is just part of the formation. We get a move up to our Fib level and we have more tahn 1 up candle since 2 was formed now as we get the 1st down bar we can mark it as 3 and set up a lmt sell

It triggered our sl is set at 1pip above high of 3 Our 1st TP which is when we will move our SL to break even is 15 pips away which gives us 70 pips if we close at that point

P
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Paulus Sep 20, 2010 1:21pm | Post# 35

5 min signal
 
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This trade has just triggered bit late in the day as US UK closed and US closing in 3 hours..

We have had an up move..albeit not so much of a trend than a sudden explosive move..however we want counter trend trades so we look for the short

We mark 1 and 2 easily and use our fib tool to get the 61.8 retracement line.

We hit it exactly and so the high at 3 can be marked wehn we get a down bar that has a lower close..That happend and so we setup a lmt sell which has been triggered

We now work out our TP level with the same fib tool going from 3 to 2

P

P
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Popeye Sep 20, 2010 2:24pm | Post# 36

in the same way
 
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Paulus,
thank you for your post,
I was trading in this way since a few weeks ago and have some success and some trades wrong, but reading your post can see I can improve my enters.
Thank you again,
Best regards.
Pop
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blueskies Sep 20, 2010 10:10pm | Post# 37

Hi, thanks for your help!

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hope that helps

P

blueskies Sep 21, 2010 12:39am | Post# 38

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Hi, I couldn't quite follow this trade.

According to the two 5-Min charts you have uploaded, count "1" is around 1.3095, count "2" is around 1.3065 and count "3" is around 1.3077. [Actual prices will vary from broker to broker, but differences should be around 1-2 pips.]

Points 1 to 2 is about 30 pips while points 2 to 3 is about 12 pips, i.e., retracement is only about 40%. Even allowing for differences among brokers' prices, I don't think there was a retracement of 61.8%. So wouldn't it mean that was not a valid 1-2-3 setup according to your trading rules?

I must have misunderstood parts of your trading rules, but I am not sure exactly where.

Thanks.


This trade has just triggered bit late in the day as US UK closed and US closing in 3 hours..

We have had an up move..albeit not so much of a trend than a sudden explosive move..however we want counter trend trades so we look for the short

We mark 1 and 2 easily and use our fib tool to get the 61.8 retracement line.

We hit it exactly and so the high at 3 can be marked wehn we get a down bar that has a lower close..That happend and so we setup a lmt sell which has been triggered

We now work out our TP level with the same fib tool going from...
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blueskies Sep 21, 2010 12:48am | Post# 39

Hi, just 2 quick questions.

(1) We want to see a minimum retracement of 61.8%. Do you have in mind a "maximum retracement"? For example, if retracement is 85% or even 95% (making the pattern looks like a double top/double bottom [DT/DB]), do you give up on this setup and wait for the next 1-2-3 pattern? Or do you actually trade it as DT/DB setup?

(2) Do we apply this "at least 2 up (or down) candles" rule for all timeframes?

Thanks!


here is a good example of the need to wait for the retracement to 61.8% and at least 2 up candles

P

Mindsphere Sep 21, 2010 1:26am | Post# 40

Hi, I couldn't quite follow this trade.

According to the two 5-Min charts you have uploaded, count "1" is around 1.3095, count "2" is around 1.3065 and count "3" is around 1.3077. [Actual prices will vary from broker to broker, but differences should be around 1-2 pips.]

Points 1 to 2 is about 30 pips while points 2 to 3 is about 12 pips, i.e., retracement is only about 40%. Even allowing for differences among brokers' prices, I don't think there was a retracement of 61.8%. So wouldn't it mean that was not a valid 1-2-3 setup...
It looks like Paulus must have made a mistake when marking up that trade. He drew the fib from 2 to 1 instead of 1 to 2. The retracement marked there is in fact 38.2 not 61.8.


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