“Principles of Professional Speculation” written by Trader Vic, highlights another great reversal pattern called ” 1-2-3 .” This pattern is also called “Three Point Reversal” or “ABC Reversal.” Trader Vic’s 1-2-3 reversal pattern is based on the Dow Jones Theory-change of trend. Prices that are rising or falling must break a trend line. In an uptrend, prices will stop making higher highs (for shorts) or lower lows (for longs) in a downtrend. During the uptrend, prices try to reach the recent high, but may fail to hold and close above the high. During the downtrend, prices may try to reach the recent low and may fail to close below the low. This provides a potential signal.
The criteria for a 1-2-3 pattern taken from Trader Vic’s Book is as follows:
- A trend line “breakout” or “breakdown” from the current trend.
- A “test” and “failure” of the previous “high” or “low” after the trend line breakout or breakdown.
- The breakout or breakdown of a “swing high or “swing low” prior to the rule 2.
Trade: After a trend line breakout or breakdown and re-test of “swing low/swing high,” a sell signal is generated in uptrend when prices close below the “swing low”. In downtrends, a buy signal is generated when prices close above “swing high.”
Target: The target is placed at the “swing low” prior to the “new high in 1-2-3 “bearish setup” and “swing high” prior to the “new low” in 1-2-3 “bullish setup.”
Stop: Place a “stop” order above the “swing high” in 1-2-3 “bearish setup” (Short) and below the “swing low’ in a 1-2-3 “bullish setup” for long trades.
Trading Trader Vic’s 1-2-3 Bearish
Trading Trader Vic’s 1-2-3 Bearish Pattern
The example above illustrates Trader Vic’s 1-2-3 “bearish setup” from the Gold futures 610 tick chart. Gold made a new high of 654 at bar (1). After a “new high,” Gold retraced and traded lower to break the trend line at 65 1 (bar 2). Gold attempted to trade higher and retested trend line but could not close above it. After bar (4), prices closed below the low of bar(2) to signal a short trade.
- Enter a “short” trade below the low of the “swing low” at 65 1.
- Place a “stop” order just above the trend line at 654.
- Place a “target” at the swing low prior to “new high at 645.5
Trading Trader Vic’s 1 -2-3 Bullish
Trading Trader Vic’s 1-2-3 Bullish Pattern
The above example illustrates a 1-2-3 Bullish pattern setup from the Russell Emini (ER2) 30 minute chart. ER2 made a new low at 724.5 and reversed its trend to the upside and traded above the trend line. After a few bars, ER2 tried to retest the lows at bar (2). At bar (3), Em’s prices reversed and traded above the recent “swing high” to trigger a “long” trade.
- Enter a “long” trade above the “swing high” at 735.5
- Place a “stop” order below the trend line low at 726.
- A “target” was set at the previous “swing high” at 745.