December 17th 2007
Trading 1-2-3’s
This is my second article in my 5 part series on the patterns I trade. In part 1 I discussed trading bases.
In part 2 we’ll take a look at one of my all time favorite day trading patterns. It’s called the 1-2-3. I first learned this pattern from Toni Hansen and the Trading from Mainstreet crowd. Toni has a description of the pattern on her site. However, the 1-2-3 is really easy to envision.
It starts with a wide range bar. Marubozu-like, but the heads don’t need to be shaven. The next bar/candle in the pattern is a narrow range candle. The one requirement of the narrow range candle is that the high of the narrow range candle and the high of the previous day’s wide range candle need to be the same. The entry is over the high of the narrow range candle. Entry is executed intraday.
There are a few reasons why I like to trade 1-2-3’s.
1. They’re easy to see. There’s no guess work when it comes to picking out a 1-2-3. Wide range candle, narrow range candle, high’s are equal.
2. I like to trade extremes. Heavy buying is indicated by the wide range candle and increased volume.
3. Lower risk. As stated above, the wide range candle already tells me this stock is hot. I want to get in, however, blindly putting in my buy order would be careless. The narrow range gives me a low risk entry as my stop is slightly below the low of the narrow range candle.
4. The merging of time frames supports the intraday trade. I rarely trade intraday without some kind of reason on the daily chart.
In the past I’ve seen 1-2-3’s occur frequently intraday and on the daily time frame. Although now I only trade them if they occur on the daily time frame.
Here’s a 1-2-3 I’m looking at for next week:
It works for shorts too! Just flip the pattern upside down.
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7 Comments »
thewild1 on 17 Dec 2007 at 3:01 pm #
looks like a simple enough concept to me
Top5 Trading Ideas for 12/18 | A Trade A Day on 18 Dec 2007 at 12:03 am #
[...] are 5 stocks flashing the 1-2-3 setup. Entry is intraday. You’ll have to check with your broker to see if there are shares [...]
gambler on 26 Dec 2007 at 8:56 pm #
I, personally, do not like graphs. But then, they are needed for visual presentations and easy interpretation, references, etc.
Trading Ideas for 1/30 | A Trade A Day on 30 Jan 2008 at 12:04 am #
[...] just like the 1-2-3 on PBR. I will be looking for an intraday setup over [...]
Trading Ideas | A Trade A Day on 05 Feb 2008 at 12:02 am #
[...] looking 1-2-3ish. Setup will be [...]
Thomas on 31 May 2008 at 11:04 am #
Hello Jonathan,
This is a great post. I have a few questions about how you trade this strategy. Toni mentions that the wide range bar should break out of support. Do you look for this criteria too or just a wide range bar? If yes, what kind of support do you normally look out for?
2. What is your target for this type of trade?
3. Assuming that that your criteria have met, a wide range candle followed by a narrow one with a close near the close of the wide candle but there is a resistance above. WOuld you still enter the trade? (This is rather a silly qn :))
4. In the above example, the narrow range bar closed at $30.05, wide range bar closed at $30 the previous day. The high for the narrow range bar was $30.14 (historical data from google finance). At what price the next day will your entry be triggered?
A lot of questions I know but would appreciate your response.
Thanks,
Thomas
Algis Morales on 02 May 2009 at 8:05 am #
If you look more carefully, what you actually have there is an inverted head and shoulders pattern.