One can never cease showing 1–2–3 pattern – this most basic and essential of formations in the market. In my view, the 1–2–3 high or low is the buttress of almost every great move ever made in a market. Why? Because virtually every trend, great or not so great, can start from it.

The 1–2–3 high or low formation not only initiates trends, but establishes them as well. They occur at major and intermediate highs and lows in a market Of course, what constitutes a major or intermediate high or low is somewhat interpretive — one of those things that is in the eye of the beholder. I'm sorry about that, but whoever said That trading was a science? There is nothing more foolish than to attempt to apply scientific principles to the art of trading.

I've stated before, and will state again here, that there is nothing scientific about the actions and interactions of markets. Market action is not mathematical, geometrical, cyclical, statistical, or theoretical. The markets move based upon the perceptions of those who trade them. Therefore, markets are emotional at times bordering on hysteria. For the most part, money is made in markets by those who most correctly read and act upon the perceptions of the masses who trade the markets.

Notice that I said, „for the most part,“

Often market moves are initiated by those who have an interest in, and the ability to engineer, such moves. Many moves, particularly short term intraday moves, are totally contrived.

Nevertheless, it is the perception by traders of market action, and their expectations for a profit, that trigger the buy/sell orders that almost continually cause markets to tick up and down.

The emotions and human behavior driving the markets can be seen in the price action as revealed on s simple bar chart showing the open, high, iow, and close of any given time period. This is true whether time be measured in seconds, minutes, hours, days, weeks, months, or years.

The more adept one is at reading the finer points of a price chart, the closer to the reality of what is actually happening in the markets one can become. The ability to r&ad the finer points of a price chart increases the probability of incurring a successful transaction when trading.

In a moment I'll show what a 1–2–3 means, and how it can evolve into an established trend. The 1–2–3 pattern is a gateway to the practical use of momentum. Momentum is created by the emotional drives of human nature as they affect the various markets. Remember, we are dealing here with human emotion as expressed by human perception of market direction. There is nothing exact about it.

1–2–3 looks like this:

The usual objective wiih 1–2–3 highs and lows is to enter a market on a breakout of the number 2 point. That is an overly simplified view of 1–2–3's and how they are traded, but it will suffice for now. The main thing is to recognize what they are. When trading in conjunction with hooks, we do not trade the breakout of the number 2 point.

Here is what I was taught about the anatomy of 1–2–3's.

1–2–3 Lows

А 1–2–3 low is characterized by 8 market reaching a major or intermediate low. The low is evidenced bv prices then making an up leg away from the low. The low is the number 1 point marked on the chart. This up leg is immediately followed by a correction as the market moves briefly back towards the low. The move back towards the low leaves behind a high which can be labeled an the number 2 point. If the correction is such that it reaches or exceeds ihe former low, the 1–2–3 low is nullified in favor of a downside move or a congestion area.

If the correction fails to reach the low and then begins to move upward, it leaves behind a somawhat higher low which can be labeled as the number 3 point.

The Meaning of a 1–2–3 Low

Since 1–2–3 lows car come at the end of a downtrend, or also after period of consolidation, it is reasonable to ask what is taking place in the market to cause this formation to occur.

When a 1–2–3 low occurs at the end of a downtrend, the number 1 point is brought about by the following events. First, there simply are no more willing sellers in the market. Prices have been pushed as low as they can go. At that point, supply shifts from too much to too little, and prices begin to move up. When those who were short, thereby pushing prices down, realize that prices have started to move up, they buy back their short positions in order to extract profits. Their buying in order to liquidate their short positions causes the market to move up. Would-be longs who have been sitting on the sidelines waiting for these short bears to finish having their fun, then begin to buy, adding to the upward price movement. Prices are then driven upward from point 1 to point 2.

Soon those early tongs, especially those with a short term view, begin to take profits by selling out at least a part of their long position. This tends to drive prices downward again away from the number 2 point towards the number three point. This downward move or correction is aided by those bears who think the market is going to go down forever. They perceive the upward move as a bear market rally, and move to establish or re-establish their short positions in hopes of a continuation of the downward trend.

If they are correct, prices will go down and take out the number 1 point, thereby nullifying any new uptrend. If they are wrong, and prices will not be pushed lower, new buying will come into the market and drive prices back away from the number 3 point and towerds the number 2 point. If prices then take out the number 2 point, a new trend may be in the process of being established, how long it will last or how far it will go remains to be seen. It is of the utmost importance that you understand the scenario I've just described. It has everything to do with the stop placement and the money management plan.

It is entirely possible that the breakout will go nowhere as the bulls and bears battle the market into a consolidation phase. This consolidation may represent accumulation prior to a later move upward, or it may represent distribution resulting in a later continuation of the downtrend. Only time will tell.

If a consolidation phase does occur, the 1–2–3 may form from within the price structure of the resulting trading range. Be aware that the 1–2–3 can form from the high of the range and result in a breakout to the downside from a 1–2–3 high. Conversely, if the 1–2–3 forms from the bottom of the range, it can result in a breakout to the upside from a 1–2–3 low.

Prices will break out to the upside if the consolidation was indeed an accumulation phase. Once the supply of the commodity is gobbled up at the low prices, there will be a shortage of supply and prices will rise according to the amount of demand in relation to the shrinking supply. A 1–2–3 low breakout to the upside usually signals that the battle is over and the bulls have won.

The Meaning of a 1–2–3 High

A 1–2–3 high breakout to the downside usually signals that the battle is over and the bears have won. Many downtrends in markets are preceded by the formation of a 1–2–3 high. 1–2–3 highs tend to be larger from top to bottom in most markets. This is because markets generally fail faster than they rise. Such is not the case in the currencies. Currency markets rise and fall relative to one another. When one is rising another correspondingly falls. A steep decline in one currency will be reflected in a correspondingly steep rise in another.

1–2–3 Highs

A 1–2–3 high is caused by the exact opposite phenomena of the 1–2–3 low. When there are no more buyers in the market, and prices refuse to rise to any greater heights, prices begin to stabilize or even to drop. The bulls, sensing that for the time being the upward move is over, begin to liquidate their long positions and take profits.

The bulls liquidate their long positions by selling what they have bought. This tends to drive prices down even more, and a number 1 point is formed. This downward action attracts the bears who are looking for an opportunity to enter the market from the short side. Their entry pushes prfces down even further. Prices move away from the number 1 high and toward what will become the number 2 point. Soon the early bears begin to liquidate at least a portion of their position by buying back their shorts.

This drives prices back towards the number 1 point, leaving behind a low that can be marked as the number 2 point. Eager bulls, and those anticipating even higher prices, jump on the bandwagon and buy, expecting new highs. They view the downward move as a bull market reaction. This drives prices even higher. If prices come all the way back and take out the number 1 point, the 1–2–3 high is nullified and the uptrend is still intact. The bulls have won.

If prices fail to take out the number 1 point because they are simply too high, prices will begin to move downward again, leaving behind a number 3 point. Longs will have to cover their positions by setting. This action, coupled with the bears jumping on the wagon to go short, may cause prices to take out the number 2 point. The taking out of the number two point to the downside establishes the downtrend. Whether or not prices will continue to slide cannot be known. Prices may go into a consolidation phase. If this happens, we have come full circle, as I've already explained the possible breakouts from the trading range surrounding the consolidation.