123 strategy

Chris L
Category:  Trading Articles
The most important thing that you as a traitor need to understand is what the trend is in the market you are participating in. This is the very first thing you need to understand in order profit. While some people will tell you that you should “never go with the herd”, the reality is that you need the herd to move the markets and therefore make your positions profitable.
The 123 strategy is simply a way to determine when a trend has changed. This is one of the most basic strategies that you can implement, but turns out to be one of the more reliable ones. The first thing you need to have is a recognizable trendline on a chart. In the ZAR/JPY pair, you can clearly see that there is a nice recognizable trendline on the daily chart. We are clearly in an uptrend. This is obviously a market that you only want to buy currently. However, what happens when we break below that trendline? That is what the 123 strategy is all about, simply taking advantage of a trend changing and getting involved in the change relatively early.

Once a financial instrument breaks down below a trendline, that normally means that we will continue to go in that direction. However, one of the most frustrating things is to place a trade after a breakout or breakdown, and have a go against you. One thing you do is employ the 123 methodology in order to get a bit of confirmation.
On the attached CAD/JPY chart, you can see that there is a trendline that the market had been following for several weeks. However, we eventually broke down and you can see that the market fell down to the number 1, then bounced back to the number 2 which was where it retested the previous trendline for resistance, and then broke down below the number 1, making the area I have labeled as number 3. That is the confirmation because we have found support, bounced to find resistance, and then broke down through the initial support. On the chart, you can see that this began a much stronger move lower and that the trendline was most certainly cleared. By waiting for the third part of the strategy to prove itself, you show that the sellers have most certainly taken control yet again.

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