Trader Vics 123 Patterns

"Principles of Professional Speculation" written by Trader Vic, highlights another great reversal pattern called "1-2-3." This pattern is also called "Three Point Reversal" or "ABC Reversal." Trader Vic's 1-2-3 reversal pattern is based on the Dow Jones Theory-change of trend. Prices that are rising or falling must break a trend line. In an uptrend, prices will stop making higher highs (for shorts) or lower lows (for longs) in a downtrend. During the uptrend, prices try to reach the recent high, but may fail to hold and close above the high. During the downtrend, prices may try to reach the recent low and may fail to close below the low. This provides a potential signal.

The criteria for a 1-2-3 pattern taken from Trader Vic's Book is as follows:

1. A trend line "breakout" or "breakdown" from the current trend.

2. A "test" and "failure" of the previous "high" or "low" after the trend line breakout or breakdown.

3. The breakout or breakdown of a "swing high or "swing low" prior to the rule 2.

Trade: After a trend line breakout or breakdown and re-test of "swing low/swing high," a sell signal is generated in uptrend when prices close below the "swing low". In downtrends, a buy signal is generated when prices close above "swing high."

Target: The target is placed at the "swing low" prior to the "new high" in 1-2-3 "bearish setup" and "swing high" prior to the "new low" in 1-2-3 "bullish setup."

Stop: Place a "stop" order above the "swing high" in 1-2-3 "bearish setup" (Short) and below the "swing low' in a 1-2-3 "bullish setup" for long trades.

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