As the name suggests, the 123 trading strategy is a simple trading strategy that relies on locating areas of support and resistance that come into play when a market is trending. You only take a position when there is a break in either one of these levels.
This strategy requires you to identify 3 points on the price chart, hence its name. The first point (Point 1) should be lowest or highest point on the chart. The second point (Point 2) will represent the opposite of point 1 (can be the highest or lowest point depending on point 1). In other words, these 2 points will represent the support and resistance levels for your trading strategy. The next point that you have to identify on the chart is Point 3. This point should not go beyond point 1. If ever point 3 is higher than point 1, then the 123 strategy is not properly set up. The diagram below shows what the set up should look like.
123 Binary Option Strategy
The strategy is simply named “1 – 2 – 3”. Let me tell you, in the days this strategy was born, marketing and trading did not go hand in hand and not everybody tried to sell you a strategy telling you that it uses a magic formula that also helped man to reach the Moon, invent hot water or other nonsense like that, hence the animistic name. The 1 – 2 – 3 strategy actually consists of a simple three point chart pattern; just look at Picture 1 below and you will understand it perfectly .
For a 1 – 2 – 3 Down we need point “1” to be the highest swing in the pattern and for a 1 – 2 – 3 Up we need point “1” to be the lowest swing in the pattern. This strategy is mainly a reversal one and the 1 – 2 – 3 Down will appear after an uptrend or at least after a move up. Conversely, the Up pattern will appear after a downtrend or at least a move down. The market is entered once the support or resistance formed by point “2” is broken. However, we don’t have a valid 1 – 2 – 3 Up pattern if point “3” is lower than point “1” and we don’t have a valid 1 – 2 – 3 Down pattern if point “3” is higher than point “1”. In any case, if point “1” is surpassed by point “3” in the opposite direction, all bets are off and we can’t apply this strategy.
How to use the 1-2-3 Strategy
First, you need to use proper charting software and set up an almost naked chart because we are interested in price swings, not some lagging indicator. I am going to explain a 1 – 2 – 3 Down pattern, but keep in mind that all the rules also apply for an Up pattern, reversed of course. After an uptrend or at least a strong move up, we must look for the 1 – 2 – 3 pattern to form, starting of course with the first peak (1). This peak will also become the top of the trend if our strategy works out (if price continues it’s up move, we will mark the new high as point 1). Now a counter move will begin and we will mark the bottom of that move with 2. At the moment we have an uptrend and a retrenchment that just ended and price started to move up. If this new move up will surpass our initial point 1, all bets are off, like I said and we go drink our beverage of choice while we wait for another setup. If the new move up does not surpass point 1 and starts turning down, we will mark the highest point of this new move up with 3. Now our pattern is complete, but there is still a very important rule that we have to follow: price must move down to break the low created at point 2. If that happens, all our conditions are met, we enter the trade by selecting Put and again, we go drink our favorite beverage.
Applying the 123 Strategy
In order to apply this strategy to your binary options trading, you need to use a proper charting software and not rely on the charts that are found on most binary options platform.
Set the chart display to the candlesticks format rather than a line chart format. The timeframe for the chart must also be appropiate for the expiry time designated for your binary options trade. But never forget to also look at the chart with a longer time frame in order for you not to miss out on the bigger picture as well.
As can be seen in the diagram above, only make a trade when the price has surpassed the point 2 level and not before. The reverse is true if prices are on the uptrend. Remember to be patient and not try to anticipate the market as such a move can easily backfire on you.
Advantages of 123 Binary option Strategy
This strategy withstood the test of time and it’s been used by Forex traders, stock traders and equities traders, being a pure price action strategy, with sound support and resistance principles. It is mainly referred to as a reversal strategy, but it can also be used in line with the trend. Ok, now look at Picture 2 and notice how the highs and lows are numbered in the newly formed downtrend and how many Put opportunities we had, all successful. In Picture 2 we enter the market each time the support formed at point “2” is broken. Most important, all the trades were taken with the trend. Also, we are protected by a bad trade: in Picture 2, our trigger to enter the market again would be the break of the last point “2” (the lowest one), but since this doesn’t happen, we stay away of a losing trade.
Disadvantages of 123 Binary option Strategy
I mentioned the words “reversal pattern” and that is where the strategy can start to suck. Everybody says “Go with the trend because it’s your friend” …and they are right, the probability of success is greater with trend entries. When trying to identify reversals, we can get burned easily if we were wrong and it turns out to be just a retrenchment. But we can avoid this by following the simple rule “…if point”1” is surpassed in the opposite direction, all bets are off”; this way, we don’t enter the market and keep our money safely in our pockets or, we can trade differently, according to the new conditions. Something that can keep a newbie away from this strategy is the fact that they can get easily confused by the 1 – 2 – 3 highs and lows, at least in the early period of using the strategy, but trust me, after a while, all the pieces of the puzzle will fall into place and things will be a lot clearer.
The bottom line
Used properly, this strategy has the potential to be very profitable. Nevertheless, you should also be realistic and know that you cannot expect to win all the time with this trading strategy, as the market has a mind of its own.
All I can say is that the 1 – 2 – 3 strategy has a big probability of becoming our personal ATM if used correctly, as per rules described in the first paragraph and it also keeps us out of some bad trades. But sometimes the market moves so hectic that all our strategies are messed up and for some reason, they all fail. Not being the “Holy Grail”, this strategy is also prone to false signals, whipsaws and other ugly stuff that the market throws at us. Overall, it’s a good strategy in my opinion and I personally traded it many times with success, but it also gave me some headaches.