What is a 1 2 3 Pattern ? We can say that it is the bottom, a correction, a re-test, and a rebound. The pattern usually occurs at the end of trends and swings, and they are an indication of a change in trend. They can also be found within a trading range, and they take place when the directional momentum of a trend is diminishing.
Long Trade : The long trade is an upward reversal following the 1-2-3 pattern forming from a previous downtrend. The downtrend bottoms out at point 1, then reverses upwards to find resistance at point 2. Point 3 is at a higher horizontal level than point 1. From point 3, price reverses upwards, breaking the resistance at point 2. The long trade is actually initiated at the point where this level is broken. So all the trader needs to be doing is looking out for the 1-2-3 formation which forms prior to the trading point.
Stop Loss : The horizontal line is the reference line in this case, and a stop loss placement few pips below the line (long order) or above the line (sell order) will work ok. This line is usually a strong level of support or resistance and will usually hold most of the time.
Profit : The Take Profit is usually left at the discretion of the trader. However, this must be set according to sensible guidelines. For instance, a trader may decide to set the Take Profit as double or triple the stop loss. Or the the distance between Point 1 and Point 2.