The 1-2-3 Pattern: A Price Action Reversal

The 1-2-3 pattern is a classic price action reversal structure. It forms when the trend loses momentum and creates three clean swing points: Point 1 is the last key high or low of the existing trend; Point 2 is the pullback; Point 3 is a final attempt to move beyond Point 1 that fails, often printing a double top or bottom. Once price breaks through Point 2, the pattern is confirmed.

How to Identify

In an uptrend, look for:

In a downtrend, reverse the structure: Point 1 is the lowest swing low, Point 2 is the pullback high, Point 3 is a lower low or a slightly higher low, and the bullish trigger is a close above Point 2.

The pattern is most reliable when Point 3 shows a clear rejection candlestick, such as a pin bar or an engulfing pattern.

How to Trade

You have three possible entry styles:

Place the standard stop loss above Point 1 (for shorts) or below Point 1 (for longs). Target the distance between Point 1 and Point 3 first, then extend to 1:2 or 1:3 risk-reward.

Real Example

Suppose EUR/USD is falling. Price creates Point 1 at 1.1200, bounces to Point 2 at 1.1280, drops to Point 3 at 1.1190, then closes above 1.1280. The bullish 1-2-3 is confirmed. A buy at 1.1285, stop at 1.1185, and target at 1.1360 is one concrete plan.

Common Mistakes

Mark Points 1, 2 and 3 clearly on your chart before the breakout, then wait for your trigger.