The Trading System 123 is a popular technique used to detect significant trend reversals in forex trading. This system is designed to be simple yet consistent for traders. Based on research, I found a straightforward trading system discussed in online trader forums, which can serve as an inspiration to create a personalized forex trading system that suits individual trader characteristics. This system utilizes the well-established 123 technique in financial markets, similar to Elliott Wave theory, to predict the next price movement direction.
Determining Points 1, 2, and 3
To implement the 123 system effectively, identifying key points in price movements is crucial:
Point 1: During a trending phase, the initial correction point is considered Point 1.
Point 2: The end of the correction level where price consolidates represents Point 2.
Point 3: This point is selected based on the 61.8% Fibonacci Retracement level from Points 1 and 2, ensuring it does not exceed Point 1.
After determining these points, the entry level to open a position is placed when the price surpasses Point 2. The Stop Loss is positioned below Point 3 for a buy position or above Point 3 for a sell position. If the price exhibits high volatility, placing the Stop Loss below or above Point 1 could be considered.
Case Study: GBP/USD on December 13, 2010
Let's examine a 15-minute chart of GBP/USD:
Point 1: At 15:20 GMT, the price was at 1.5793. It started to correct and reached 1.5718 at 17:15 GMT, marking Point 1.
Point 2: By 19:15 GMT, the price reached 1.5765, indicating Point 2.
Point 3: Using the 61.8% Fibonacci Retracement from Points 1 and 2, Point 3 was identified at 1.5736. The price exceeded this level but did not surpass Point 1, confirming Point 3's validity.
Risk Management
When managing risk using the 123 trading system, apply the following strategy:
Two Lots: Open two lots for a trading position.
TP1 and SL1: Close the first lot upon reaching Target Profit 1 (TP1), equivalent to the distance between Point 2 and Point 3. Place Stop Loss 1 (SL1) below Point 3 for a buy position.
SL2 and TP2: After TP1 is achieved, raise Stop Loss 1 (SL1) to SL2 to protect the second lot from potential losses. Close the second lot at TP2, which could be twice the distance between Point 2 and Point 3.
Advantages of Using the 123 System
Simple and Easy to Understand: Utilizes basic price movement patterns without relying heavily on technical indicators.
Flexibility: Applicable to various currency pairs and time frames.
Effective Risk Management: The two-lot strategy allows for better risk management by safeguarding the second position after achieving the first target.
By understanding and following these steps, you can effectively leverage the 123 trading system to enhance your chances of profiting from forex trading. Best of luck and may you achieve success in your trading endeavors!
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