The 123 pattern is a classic technical analysis pattern in the financial market. Its core is to identify trend reversals or continuations through three key high and low price points. Due to its clear structure and definite signals, it has become a commonly used analytical tool for both novice and experienced traders, applicable to all trading markets with candlestick charts, including stocks, futures, and cryptocurrencies.
1. Core definition of the 123 pattern: three key points outline the trend reversal.
The essence of the 123 pattern is the 'turning signal after trend exhaustion,' consisting of three consecutive price nodes (highs or lows). The core logic is: the existing trend can no longer create new highs/lows, followed by a breakthrough of key positions, confirming the start of a reversal trend.
The definitions of these three key points are clear, requiring no complex calculations, and can be easily recognized at a glance:
1. Point 1 (trend endpoint): The last extreme high point of the original trend (in downward reversal pattern) or extreme low point (in upward reversal pattern), marking the end of the previous one-sided trend. For example, in an upward trend, the price reaches the highest point and then starts to fall back, this highest point is 'Point 1';
2. Point 2 (retracement/rebound point): After Point 1 appears, the price retraces in the opposite direction (when rising turns into falling) or rebounds (when falling turns into rising) to form high and low points, which is the balance point of the first competition between bullish and bearish forces in the market and also serves as a 'warning signal' for trend reversal;
3. Point 3 (confirmation point): The price tests again in the original trend direction from Point 2 but fails to break above Point 1 (i.e., does not make a new high/new low), then breaks in the opposite direction below the high and low of Point 2—this 'not breaking Point 1 + breaking Point 2' node is Point 3, marking the formal confirmation of the reversal trend.
Two, the two core types of the 123 pattern: upward reversal and downward reversal.
The 123 pattern is mainly divided into two categories, corresponding to the scenarios of downward turning into upward and upward turning into downward, with symmetrical structures and consistent judgment logic:
1. Upward reversal 123 pattern (bottom reversal, suitable for bottom fishing)
Appears after a long-term downward trend, marking the end of the bearish market and the imminent start of an upward trend:
- Point 1: The last low point of the downward trend ("valley bottom"), the price creates a new low and then starts to rebound;
- Point 2: The high point formed from the rebound of Point 1 ("rebound top"), which is the first obvious rebound in the downward trend;
- Point 3: The price falls back from Point 2 but does not break below the new low of Point 1 ("not making a new low"), then breaks upward above the high of Point 2—at this point, Point 3 confirms that the upward reversal pattern is complete.
In simple terms, it means "the decline has stopped → rebound → test the bottom again without breaking below → break through and rebound to a high point," which is equivalent to the market "finding solid footing" at the bottom before starting to push upward.
2. Downward reversal 123 pattern (top reversal, suitable for shorting)
Appears after a long-term upward trend, marking the end of the bullish market and the imminent start of a decline:
- Point 1: The last high point of the upward trend ("peak top"), the price creates a new high and then starts to retrace;
- Point 2: The low point formed from the retracement of Point 1 ("retracement bottom"), which is the first obvious retracement in the upward trend;
- Point 3: The price rebounds from Point 2 but does not break above the new high of Point 1 ("not making a new high"), then breaks downward below the low of Point 2—at this point, Point 3 confirms that the downward reversal pattern is complete.
Commonly understood as 'the rise has stopped → retracement → another push up without breaking through → breaks below the retracement low,' indicating that the market 'loses power to attack' at the top and begins to fall back down.
Three, the core value of the 123 pattern: simple, objective, high win rate.
The 123 pattern can become a classic tool, as its core solves the pain point of traders 'guessing tops and bottoms', with significant advantages:
1. Simple structure, easy to recognize: no complex indicators needed, just judging by the highs and lows of candlesticks can determine, newbies can learn in 5 minutes, without worrying about 'whether it conforms to the pattern';
2. Objective signals, no subjectivity: The definitions of the three points are clear (new high/new low, retracement/rebound, breakthrough), with no gray areas, avoiding subjective misjudgment of 'feeling like a reversal';
3. Wide applicability, strong versatility: whether daily, hourly, or any cycle, or any variety of stocks, cryptocurrencies, etc., as long as there are price fluctuations, the 123 pattern can be used for analysis;
4. Clear stop loss, controllable risk: After confirming the pattern, the stop loss can be directly set outside of Point 1 (upward reversal stop loss below Point 1, downward reversal stop loss above Point 1), once the price returns outside Point 1, it indicates that the pattern has failed, exit immediately, and the risk can be quantified.
Essentially, the 123 pattern is the result of the market trend 'self-verifying'—it makes the reversal signal more reliable through the three-step process of 'trend ending → testing → confirmation', avoiding the risk of entering too early while not missing the key node for trend initiation. For traders pursuing 'simple and effective', the 123 pattern is an excellent tool for entry-level technical analysis and an indispensable 'trend detector' in practice.
Content is for reference only and does not constitute investment advice!
