What Is A 1-2-3 Chart Pattern?

123 chart pattern

BABA Example Trade

I like Alibaba (BABA) and trade it quite often. Imagine that we began looking at the price action on Dec. 24, 2020. This is our A point for the 1-2-3 chart pattern, and the closing price was $222. Take note of the RSI on Dec. 24. It is 12.7, indicating that our stock is oversold and poised to rally. On Dec. 30, 2020, we see our B point and on Jan. 7, 2021 as well.

Then on Jan. 14, we see BABA close at $242.98 and it has reached above the B line ($238.39). Here is our buy trigger on Jan. 14, and the RSI is about 58. It’s a little higher than we might like, but it tells us that BABA is not oversold and it still has room to rise.

123 pattern trading strategy

Our strategy is indicating a trade trigger based on the stock rallying higher, great. So, what to trade? I am a big fan of defined risk trades and the put credit spread (PCS) is among my favorites.

Bull Put Spread Trade Setup

  • Date executed: Jan. 14, 2021.
  • Sell 1 put option, expiration Feb. 19, 2021 (36 DTE), strike $205.
  • Buy 1 put option, expiration Feb. 19, 2021 (36 DTE), strike $200.
  • Premium: $155.
  • Capital At Risk: $345.

Let’s fast forward to Feb. 12, 2021, one week prior to expiration. I don’t like to hold winning trades into expiration week because gamma can quickly wipe out all your gains very quickly. In our example case, BABA is trading at $267.77 on Feb. 12. This serves as a nice profit for us.

123 candlestick pattern

We had to put up a $345 margin, and we received $155 premium to open the trade. Depending on your account size, you could have traded 5-7 spreads easily, as each spread only had a $345 buying power reduction in your account. So, how did we do? Well, we made $119.90 and we had a buying power reduction of $345, so our profit is 34.75% ($119.90 / $345.00).

1-2-3 reversal pattern

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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Comments

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William K. 1 month ago Member's comment

Really quite interesting. But how can something with no mass have inertia? Or is inertia being used to describe a slow response time? And the quick trading, buying at that "c" point on the curve and hoping to sell at that unmarked peak that follows is trusting that there will be a buyer at that price. And I have not found a way to magicly produce buyers always wanting to pay what I ask.