1-2-3 Reversal Pattern

Entry Logic

• Enter long on a breakout above point 2 of a 1-2-3 bottom pattern.
• Confirmation is a higher low at point 3 compared to point 1.
• Use a 30-minute timeframe for this pattern.
• Entry should be above the 50-period SMA.
• This pattern works best in a trending market that is pulling back.

Exit Logic

• The profit target is a measured move from the breakout, equal to the distance between point 1 and point 2.
• Scale out 50% at the measured move target.
• Trail the remaining position with the 20-period EMA.
• Exit if price closes back below point 2.
• Exit on a confirmed 1-2-3 top pattern.
• Exit if the trade is not profitable within 2 days.
• Exit if the RSI (14) drops below 50.

Stop Loss Structure

• Place a hard stop below point 3 of the pattern.
• A soft stop is a close below the 50-period SMA.
• Maximum dollar loss is $600 per trade.
• Maximum percent loss is 1.2% of the account.
• The structural stop is the low of point 3.

Risk Management Framework

• Risk 0.8% of the account per trade.
• Daily loss limit is 2.4% of the account.
• Weekly loss limit is 6% of the account.
• Maximum drawdown is 18%.
• Minimum risk-reward ratio is 2.5:1.

Position Sizing Model

• Use a fixed fractional sizing model.
• No volatility adjustment is needed.
• Use 1.5x size for A+ setups.
• Do not scale into trades.
• Scale out at the measured move target.

Trade Filtering

• Avoid trading this pattern in a strong downtrend.
• Requires a clear 1-2-3 pattern with a higher low at point 3.
• Trade only stocks with a high relative strength.
• Avoid trading during the first 15 minutes of the open.
• Do not trade in low-volume, choppy markets.

Context Framework

• The daily chart should show a clear uptrend.
• Price should be trading above the VWAP.
• Price should be above the 200-day SMA.
• The pattern should form after a pullback to a support level.
• The weekly chart should show a bullish bias.

Trade Management Rules

• Move the stop to breakeven after price has moved 1R in your favor.
• Scale out 50% at the measured move target.
• Do not add to winning trades.
• Be aggressive with profit taking in fast-moving markets.

Time Rules

• The optimal time to trade this pattern is in the morning session (9:30 AM - 11:30 AM EST).
• Avoid trading this pattern in the late afternoon.
• The pattern is most reliable on Wednesdays and Thursdays.

Setup Classification

• A+ setup: Clear 1-2-3 pattern, high volume breakout, strong trend alignment.
• A setup: Clear 1-2-3 pattern, moderate volume, neutral market.
• B setup: Messy 1-2-3 pattern, low volume, counter-trend.
• C setup: No clear pattern, avoid.

Market Selection Criteria

• Trade stocks in the technology and healthcare sectors.
• Minimum daily volume of 4 million shares.
• The stock should have a beta greater than 1.2.

Statistical Edge Metrics

• Expected win rate is 65%.
• Average win is 3R.
• Average loss is 1R.
• Profit factor is 1.95.
• Expectancy per trade is 0.95R.

Failure Conditions

• The strategy fails if the breakout is false and price reverses.
• A common failure is a failure to make a new high after the breakout.

Psychological Rules

• Have the patience to wait for the pattern to set up correctly.
• Do not chase the breakout if you miss the entry.

Advanced Components

• Use a market breadth indicator to confirm the reversal.
• A volume profile analysis can identify key support and resistance levels.
• Avoid trading this pattern on stocks that are highly correlated.
• The 4-hour chart must show a clear change in trend.

Location

• The setup is strongest when it forms at a key support level in an uptrend.
• The setup is weakest in a strong, persistent downtrend.
• The location of the pattern within the overall trend is critical.