The 1-2-3-4 reversal chart pattern is composed of four distinct points, labeled as points 1, 2, 3, and 4. This pattern is typically identified following a significant up or downtrend in a currency pair and can be easily identified using a specific set of trading guidelines.
To confirm the reversal, traders often use technical indicators like ADX or MACD.
Look a sample picture bellow :
Step (1): Identify the peak in an upward trend of the currency market.
Step (2): Observe a downward correction within the upward trend, locate the lowest point in the correction before the price moves upward again to reach step (3).
Step (3): Identify the peak in the upward movement from step (2) but note that it should not exceed the peak of step (1).
Step (4): To initiate a short trade, enter at a point 1 pip below step (2).
Forex Trading System for Reversals using 1-2-3-4 Pattern
Pair: Any pairs
Time Frame: Any (M15, H1, H4, Daily)
Indicators: MACD, ADX/DMI (Oscillator Types)
1-2-3-4 Up Forex Reversal Strategy with MACD Indicator
Buy Setup
- Identify a strong downward trend before applying this reversal pattern
- Mark points 1, 2, and 3 on the chart
- Place a buy order 1 pip above point 2
- Use the MACD indicator (or another) to confirm the trade, it should indicate a buy signal or be in buy mode.
- Set the target level by calculating the distance between points 2 and 3; if the distance is 45 pips, then your target level should be set at 45 pips.
- Place a stop loss order 1 pip below point 3"
1-2-3-4 Up Forex Reversal Strategy with ADX Indicator
Sell Setup
- Identify a strong upward trend before applying this reversal pattern
- Mark points 1, 2, and 3 on the chart
- Place a sell order 1 pip below point 2
- Use the ADX indicator (or another) to confirm the trade, it should indicate a sell signal or be in sell mode.
- Set the target level by calculating the distance between points 2 and 3; if the distance is 250 pips, then your target level should be set at 250 pips.
- Place a stop loss order 1 pip above point 3
