All I did was search the Web for a great Foreign exchange technique. Then I discovered the 123 candlestick sample and I by no means needed to search for one other technique once more. Truly, all I used to be fascinated by was buying and selling entries. I assumed if I might choose the best course each time, I might make 1,000,000 bucks out of my measly $8000 buying and selling account. I checked out lots of of various methods, nicely, entries. I even spent some cash on a number of of them. I learn all about self-discipline, buying and selling psychology, taking your “hits”, danger administration, commerce administration, controlling your feelings – however I rejected all that. I had a great deal with on my feelings and was a disciplined particular person (more often than not.) All I wanted was my magic bullet, my crystal ball, my time machine after which I’d be a dealer. I didn’t care about something however discovering an entry technique.
Let me inform you now. I began doing that in 2004. In 2009, I used to be nonetheless doing that, however my $8000 account was now about $500 and I nonetheless couldn’t generate profits. It’s a great factor I didn’t fairly my day job. Then I met Casey at Winner’s Edge Buying and selling and he slapped me round and made me notice that the entry was about 5% of the deal and all of the stuff I rejected was the opposite 95%. All that I had discovered in these 5 years got here again to me in a flash (I suppose I used to be paying nearer consideration to it than I noticed) and I turned a worthwhile dealer in just some months. I joined Casey’s workforce at Winner’s Edge quickly thereafter because the Asia Session Buying and selling Room Moderator.
I stated all that to say this: I’m going to point out you my favourite technique with numerous examples, however I’m not going to cease with simply exhibiting you how you can do the entries. As I discussed, entries are solely a small a part of a profitable buying and selling technique. If you happen to get the entry proper half the time (that appears statistically doable, doesn’t it) and also you get the opposite issues proper, you may nonetheless make a potload of cash as a dealer. You see, dropping is a part of your job. If you happen to don’t take your loses, you’ll by no means make it as a dealer. I do know that sounds flawed as a result of we’re taught all our lives that we needs to be winners. However, except you personal the aforementioned crystal ball or time machine, you’ll by no means be 100% appropriate on the course of the market. The market breathes out and in and can go down whereas it’s going up after which go sideways for some time. It’s pretty unpredictable. What’s predictable are human feelings. When the market goes of their course, many (most) are experiencing greed – look how a lot I’m making, gotta get all of it. When it’s going towards them, they’re experiencing worry – when will it cease? ought to I get out? That’s the explanation why I wish to commerce on pure value motion. I nonetheless use some indicators, although. They can provide you a really feel for the course of the market. However solely the value motion can present you ways our feelings are affecting the market.
What’s a 123 Reversal?
A 123 Reversal is just an image of that emotion on a candle chart. Let’s discuss first a couple of 123 excessive. That’s what I name a 123 reversal that occurs on the prime of an uptrend. In Forex, all the things that occurs in an uptrend can occur in a downtrend as nicely as a result of currencies are traded in pairs, one towards the opposite. So, for instance, an uptrend within the EUR/USD foreign money pair is definitely simply the Euro buying and selling greater and better towards the US Greenback. On the similar time, the US Greenback is in a downtrend towards the Euro. Which may be completely different in futures or equities markets as a result of many uninitiated merchants suppose that you would be able to solely commerce lengthy (purchase) and may’t conceive of going a commerce during which you promote to open. That is additionally known as the 123 reversal sample and when you be taught to search out it you will notice a fast enhance in your buying and selling success.
The primary component to search for in a 123 excessive is a robust uptrend. 123 reversals occur on a regular basis within the context of buying and selling ranges and consolidations however don’t observe via as a result of the market is buying and selling in a variety. The uptrend needs to be at the very least one and a half occasions the scale of the 123 sample (which we’ll take a look at shortly) as a result of this pattern will assist outline your goal. The pattern needs to be pretty
robust with out a whole lot of retracements and pauses. The stronger the higher. If you happen to observe commerce volumes in your chart, you must also be seeing robust quantity (I like quantity as and indicator – though the quantity might not be an precise illustration of the quantity on a pair, it does provide you with some indication of collective opinion of your dealer’s merchants. Which is an effective purpose to get your charts from an enormous dealer even in case you don’t commerce there.)
To the left you see a possible setup occurring. This can be a robust uptrend with quantity. You possibly can see this proper now (12/6/2013 @ 10am NY Time) on a GBP/JPY hourly chart. You will notice that this isn’t but a 123 excessive, however it’s undoubtedly obtained a great begin.
The image reveals an hourly chart, however a 123 reversal can happen on any time-frame because it’s exhibiting you the feelings of merchants and never essentially depicting a specific occasion. I choose to have a look at them on an hourly chart or greater, however that’s as a result of they occur too quick for me on the decrease time frames.
The following component to search for is an exhaustion excessive level – that is level no 1 of your 123. One thing like a pin bar or an engulfing bar. Though it doesn’t should be as excessive as a pin bar, that might serve to exhibit a really robust exhaustion or euphoria level and would give me extra confidence. I particularly wish to see this occur at a historic resistance stage. That simply offers it extra legitimacy.
Once more, to the left you may see the identical uptrend I confirmed you earlier, however this time I included a number of the candles to the left. You see this pause (it’s only a pause proper now, we’ll should see if it turns into something greater than that) occurring proper at a historic space of congestion.
After the excessive level, your subsequent job is to search for a pull-back. It may possibly occur on the identical candle, however I choose to see it on subsequent candles. It simply seems to be higher to me that means. If it seems to be occurring on the identical candle, drop right down to the following decrease time-frame and see the way it seems to be down there. Typically I discover that it’s higher wanting on the decrease time-frame. This would be the quantity 2 level of your 123.
Subsequent, you’re searching for a brand new excessive, however it should be a decrease excessive than the #1 level. If the following excessive exceeds the purpose 1 excessive, then your 123 excessive is blown and you may transfer on and look elsewhere. Once more, I wish to see a pin bar or engulfing bar right here, however it’s not needed. I wish to see quantity affirmation, however there’s often a lot much less enthusiasm for this excessive than the #1 excessive.
To the left you will notice what was a possible 123 excessive that’s about to be blown. This was wanting like a reasonably good 1 2 three buying and selling technique sample till the previous couple of minutes when it began to check the #1 excessive. This instance is on the EUR/GBP H4 (four hour / 240 minute) chart on 12/6/2013 round Midday NY Time.
Now you’ve obtained your preliminary 123 setup. Formally, your commerce entry is a break of the quantity 2 level to the draw back. Though, of all of the doable 123 commerce methods, that’s my least favourite as a result of it requires you to danger essentially the most pips and subsequently requires you to commerce with the smallest measurement. I really take as many as three completely different positions on 123 reversals – however we’ll get to that later in our story.
Why do 123 Reversal happen?
As I’ve stated, charts mirror the feelings of merchants. Sure 123 sample technique happen commonly on charts. We’ve all seen head and shoulders patterns, varied triangle and flag patterns and the extra complicated harmonic patterns. The explanations these patterns proceed to offer buying and selling alternatives is that the feelings that induced these patterns are constant and occur often. The patterns don’t at all times maintain – generally they’re affected by different elements like information – however they’re constant sufficient that we will use them to make earnings available in the market.
The number one level happens at a spot the place merchants who had been lengthy available in the market resolve they should safe the earnings they made throughout the pattern up. That’s why the preliminary pattern is essential. It’s additionally why you must look ahead to this level at a spot of robust resistance. It’s the place the place merchants will really feel that the market could stall or flip. In different phrases, they worry they might lose the earnings they’ve obtained in place. The surge in quantity is as a result of “not so good” cash lastly recognizing the pattern and leaping on the bandwagon (euphoria – “this pattern might final endlessly, I gotta get me some”.) That surge in quantity often occurs when a transfer has reached exhaustion. The amount is a sign that the good cash is passing on their holdings to the latecomers, leaving them “holding the bag”. That is the primary level.
In fact, after there aren’t any extra merchants to purchase up the positions the latecomers entered, the value begins to drop. As the value drops, the good cash sees a possibility to presumably make a bit of revenue on one other pop to the #1 excessive, however they’re much less dedicated as a result of many of the long term momentum indicators are nonetheless giving overbought indications and the market has simply made an enormous up transfer. Ultimately, all of the latecomers that purchased whereas the market was on the peak are experiencing worry. Because the market continues to drop, they unload these positions to the good cash – who’re extra keen to purchase as the value drops decrease. Till there aren’t any extra people eager to promote. That’s the quantity 2 level.
Now that the latecomer sellers are gone, costs will begin to transfer up once more. The good cash people purchased from the latecomers, so now because it begins to go up once more, the latecomers determine they obtained out too quickly and begin shopping for once more, however since they had been burned earlier than, they’re a bit of extra cautious, so fewer of them become involved this time. And naturally, the good cash people are greater than keen to take their earnings because the market goes up. However since there are fewer keen to purchase this time, when the value peaks, it usually doesn’t get as excessive because the primary level earlier than it begins dropping once more. That is the quantity three level.
Because the market begins to drop from the quantity three level, the extra educated, good cash merchants acknowledge that this may very well be a reversal or the start of a buying and selling vary, however on the very least, they’re keen to promote right down to the quantity 2 level once more – which is strictly what we are going to do. This causes costs to drop again to the quantity 2 level – usually breaching the quantity 2 level by a number of pips.
When do 123 Reversals happen?
As I discussed earlier than, 123 reversals most frequently occur at areas of assist and resistance. They occur after a great robust pattern. They’ll occur on any time-frame on any instrument. On the shorter time frames (lower than one hour), you must watch regularly or you’ll miss your alternative. Typically you may see one after an enormous information occasion.
That’s why I choose to commerce hourly or greater. I day commerce periodically and can watch the 5 minute and 15 minute charts, however I’ve a brief consideration span, so I’ve obtained to be in the best state of mind to try this. I do know people that do it on the 1 minute charts and make numerous pips day by day doing it. I simply can’t focus that a lot for that lengthy. That’s why buying and selling is such a private factor. You must know your strengths and limitations to be a worthwhile dealer. I attempted to commerce like another person, however I couldn’t be worthwhile that means. That’s one of many issues I discovered early on from Winner’s Edge.
I didn’t imply to digress into dealer psychology, however in my view it’s an important think about buying and selling success, so I assumed it warranted a number of phrases.
How do I commerce a 123 Reversal?
I exploit three completely different entries for the 123. The primary one is what I name “dishonest the quantity three level”. The second is buying and selling the “normal” break of the quantity 2 level and the third is to commerce the retracement after the break of the quantity 2 level. My favourite entry is dishonest the quantity three level as this may be accomplished with little or no danger, pretty giant commerce measurement and works fairly nicely.
How do I decide place sizes?
I’ll go into extra element about entries beneath, however I’ll take most of the primary 123 reversal place (dishonest the quantity three level) off earlier than the second entry level happens. Additionally, the primary place, whereas having a low danger by way of pips – additionally has a decrease chance of success. Due to these elements, I often use about half my normal commerce measurement on the primary place. I then use half on the second entry and half on the third entry.
My buying and selling guidelines state that I can solely danger 2% of my account on any single commerce setup. So every of my positions will danger 1% of my account. Calculate the variety of pips to your cease loss on every place (we’ll speak about the place to put stops a bit of later) and use a danger calculator to find out your commerce measurement. Winner’s Edge Buying and selling has a danger calculator- you’ll find it proper right here. Use it with our compliments.
How do I enter and handle the positions?
As I’ve talked about a number of occasions, I exploit three completely different entries in buying and selling 123 reversals. The primary one I name “dishonest the quantity three level”. The completion of a quantity three level is the primary indication 123 reversal could also be occurring. Formally, it’s not a 123 reversal till it breaks the quantity 2 level in order that’s why I name this entry a “cheat”. After I see the primary two factors and see value pop to the quantity three level and begin to drop, I begin anticipating the entry. As quickly as value breaks beneath the very best candle on the quantity three level, I take a brief entry with a cease loss simply above the quantity three level. For the reason that quantity 2 level is a reasonably vital assist stage, I shut about 90% of the place on the quantity 2 level and set the cease to interrupt even (the entry level) on the remaining 10% of the place.
The second entry is the “normal” commerce technique for the 123 reversal. The truth is, upon getting a quantity three level, you may put a pending brief a number of pips beneath the quantity 2 level. How far beneath the quantity 2 relies upon upon the time-frame you’re buying and selling. When buying and selling the hourly time-frame, I often put the order 5 pips beneath the purpose. You’ll want to make allowance for the unfold. Because you’re probably taking a look at a Bid chart, then you definitely received’t should take unfold into consideration. If you happen to’re buying and selling a 123 low you may be inserting a pending lengthy and you’ll have to permit for the unfold. Keep in mind that on the longer time frames, the unfold may very well fluctuate earlier than the entry is made. I wish to commerce this utilizing a foreign exchange 1hr chart technique.
As I discussed, the chance is bigger on the second entry. It’s essential place your cease a number of pips above the #1 level. You’ll probably see the value bounce proper after your entry and it might consolidate some earlier than dropping, so don’t sweat it, simply trip it out. You must goal the consolidation from the place the uptrend started. That’s why I recommend that you just make certain the uptrend is at the very least one and a half occasions the scale of your 123 sample. That will provide you with a great risk-reward ratio. Hout of all the foreign money buying and selling methods I’ve traded that is by far my favourite.
After the value drops beneath the consolidation on the quantity 2 level, it probably will pop up in a retracement (the market likes to let off steam after breaking a big barrier just like the quantity 2 level – merchants taking earnings.) That retracement will provide you with your alternative to your third place. Look ahead to the value to pop after which drop just under the low of the very best candle within the retracement. That’s your brief entry. Place your cease above the retracement for a pleasant tight danger and goal the identical place because the second place, the consolidation from which the preliminary uptrend got here. That is prone to be essentially the most worthwhile place of all three of them with it’s small cease loss.
And there you may have it. Keep in mind that all the things I stated a couple of 123 excessive applies in reverse to a 123 low. I at all times thought it was complicated when writers tried to deal with the wrong way trades proper in amongst the opposite trades so I attempted not to try this.
Keep in mind that not all 123 reversals will look good. The truth is most of them received’t be good. Not all 123 reversals will provide you with a possibility for all three positions both. That’s OK. You possibly can simply commerce the second place if there’s simply not sufficient reward to danger on the fist place. You’ll get used to discovering them they usually’ll simply bounce of the display after some time.
You’ll want to follow the principles and don’t take revenue too early or you’ll kill the profitability of this technique. And bear in mind to not freak out if the commerce goes towards you and/or stops out. That’s a part of the job. You’ll take losses with this reversal sample technique so be ready for that. And please depart feedback and questions beneath.