In today’s trading tutorial we are going to discuss one of my personal favorite price-reversal patterns, called the ‘Three Point Reversal Pattern’. This pattern is also referred to as the ‘1-2-3 Reversal’ or the ‘ABC Reversal’.
The Three Point Reversal Pattern is based on the Dow Jones Theory of trend-change, and we find these simple price-reversal patterns in every liquid market around the world.
|Three Point Reversal Pattern|
The most attractive aspects of this day trading pattern are the simplicity of the pattern, and the very small amount of risk compared to the reward on each trade.
This theory says that when price is ‘trending’ in one direction we must first break a trend-line and then break a recent price-swing in the opposite direction.
4 Simple steps to Trade the “Three Point Reversal Pattern”:
Step 1: Find the Pattern
The first part of the Three Point Reversal Pattern requires a trend-line-break in the opposite direction of the trend.
The second part of the pattern requires a swing-high (bullish) or swing-low (bearish) to be formed on the chart.
Step 2: Find the Entry Trigger
The entry is triggered LONG when the price moves above the trend-line and swing-high.
The entry is triggered SHORT when the price moves below the trend-line and swing-low.
Step 3: Place your stop-loss
We always use a protective stop-loss, which is placed below the lows for a LONG, or about the highs for a SHORT.
Step 4: Place your Profit-target(s)
We use profit-targets to lock in profit on each trade, and we use swing-highs for a LONG, and swing-lows for a short.
Find the next major swing-high (long) or swing-low (short) and use those as your profit-targets.
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