The 1-2-3 pattern is a very strong reversal pattern. And the good thing is that it shows up very often on the 5-minute frame with a pretty high probability of winning. If you can combine it with another equally powerful signal - the RSI divergence, you can catch a big wave with very high potential returns on low timeframes.

The 5-minute frame will be suitable only for those who have time to observe the chart, day traders, and scalper. Do not encourage traders with little time to use this system, as you will have to spend at least a few hours per day observing the chart.

If you trade only 1 currency pair I recommend EURUSD M5. This is a pair with a fairly gentle movement, conforming to the pattern. In addition, you can choose other major FX pairs to trade, avoid cross trading because they often fluctuate very aggressively and unpredictably.

Setup entry includes a 1-2-3 pattern and RSI divergence.

Discount 1-2-3 model:

We have wave 1 which is the wave leading to the highest peak of the uptrend -> wave 2 creates a higher low -> wave 3 creates a lower high, theoretically will enter SELL when the price breaks the bottom 2, stop loss above top 3.

For example:

A bullish 1-2-3 pattern:

On the contrary, wave 1 is the wave leading to the lowest bottom of the downtrend -> wave 2 creates a lower high -> wave 3 creates a higher low, theoretically will enter BUY when the price breaks the top 2, stop loss bottom 3.

For example:

However, in this system we will enter a different order from the theory to get higher profits, since the theoretical stop loss is too wide, it is impossible to have a special advantage on a low timeframe like M5.

Principles of buying BUY orders:
  • Detects a 1-2-3 pattern reversing from bearish to bullish;
  • RSI has a bullish divergence (bottom 3 is lower than bottom 1 but RSI makes a higher low)
  • Price breaks top 2 and recovers to retest this peak;
  • Entry BUY now, or place BUY limit before at this level, stop loss below the nearest swing low
Principles of entering SELL orders:
  • Detects a 1-2-3 reversal pattern from bullish to bearish
  • RSI has a bearish divergence (high 3 is higher than 1 but RSI makes a lower high)
  • Price breaks bottom 2 and bounces back to retest this bottom;
  • Entry SELL or SELL limit, stop loss on the nearest swing high
For example:

The price broke the 1-2-3 pattern up at the top 2 and then recovered to hit this peak, the BUY entry at the up arrow.

For example:

The price breaks the 1-2-3 pattern in combination with the RSI bullish divergence, the BUY entry at the up arrow when the price retraces the top 2.

For example:

BUY at arrow up; then SELL right at the down arrow.