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How To Trade Midrange 1-2-3 Reversals (Part 2)

By  +Follow December 9, 2013 1:23PM
Tickers Mentioned:

In our first article, we looked at Midrange 50% Retracement Patterns (also known as “1-2-3 Reversals”) for both day and swing trading patterns. In this final article in this two-part series we’ll take a closer look at specific pivot patterns to focus on when using this trading strategy.

Entering 50% “1-2-3 Reversals” With Candlestick Patterns

The best entries for long trades in pivot reversals are those generated by Japanese candlestick signals; specifically hammers and bullish engulfing patterns. When combined with the 50% retracement price action trading strategy, this technique can help traders easily spot entry price action signals to start using.

In Figure 1 Expedia Inc. ($EXPE) there’s a 1-2-3 reversal pattern on the left of this intraday chart. Zooming in to the inset chart, a closeup 1-minute chart, a bullish engulfing pattern is readily observed at just over 63.0. A bullish engulfing pattern is one in which, the second candle in a downtrend reversal pattern completely engulfs the prior candle, which this one does. 

The long entry is set just above the high of the engulfing candle, which in this case would be just above 63.06. This same pattern can be used on swing or position trading charts as well. The key is to wait until after a reversal begins, to prove that price action has in fact reversed course and new buyers are driving price up.  

When using this pattern, a reversal needs to be seen first (preferably with larger volume on the right side of the reversal) prior to getting into the trade. It’s not a “1-2-3 Reversal” unless there’s some valid pivot long price action first.

Guessing at whether or not something will bounce at a 50% level is risky and should be avoided; it’s much smarter to wait until a genuine long reversal is seen, preferably with both candle and volume patterns, before getting into the trade.    

Swingtrading with Major Moving Averages, Hammers and Midrange Reversals

Using a 90-day chart, it’s helpful to plot the simple 50, 100 and 200 moving average lines (Mas), to identify major trend strength, pivot levels and trading signals. In Figure 2 Mattell Inc. ($MAT), we begin the start of the 1-2-3 pattern at $43, just as it breaks above the 100 blue MA line. 

Now we wait to see when the major 50% pullback occurs. In this chart, that begins Nov. 1, pulling back from a high of 46 down to the midrange reversal of $44.5 area. Finally, we look for a bullish candle reversal pattern; in this case we saw the hammer on Nov. 8, and set a long entry above the high of the hammer.

This is a good example of an advanced use of the technique. Once you begin to spot these recurring patterns, it’s a matter of developing a smart trading approach that capitalizes on price action as it begins to go in your favor. From a trade management standpoint, it’s often useful to scale in (also known as “position sizing”) to winning trades once they’ve moved at least two points in your favor.  The entry trigger should be above the prior high of the 1-2-3 pattern, and at least $2 above the initial entry (whichever is furthest up).  In this example, the initial entry in Figure 2 would be just above the hammer high, over $44.7, with a second entry trigger at (44.7 + $2) = $46.7.

Final Tips On Using the 50% “1-2-3 Reversal” Patterns For Trading

When uncertain as to whether a trading chart matches this pattern, it’s helpful to see how wide and “clean” the chart pattern is, and only trade those with strongest patterns. Where traders get into trouble is misreading charts, or overtrading choppy uncertain chart patterns.  Developing professional pattern recognition skills takes many years of practice, which is why it’s a good idea to keep a trading journal and do a lot of papertrading/demo account trading when testing out this (and other) new strategies.

It’s also smart to use this pattern in combination with other core breakout and pivot trading patterns, to develop an array of skills to use together.  This pattern recurs so often, like other classic Western patterns (cups, pennants, ascending triangles), it’s a very useful momentum day and swing trading techniique to add to one’s personal trading arsenal.  

Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders.  He is a UCLA alumnus and is the founder of TradeMastery.com and DaytradingUniversity.com, popular online educational sites that reach tens of thousands of active traders worldwide.   ###

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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Results for EXPE
28 Aug 14 16:15:38
$EXPE New SEC Document(s) for Expedia, Inc. From our Stock News Alerts App
28 Aug 14 16:02:07
$EXPE - Statement of Changes in Beneficial Ownership (4) http://t.co/NV9SVagtfZ
28 Aug 14 16:00:09
Mark Okerstrom D, Chief Financial Officer of Expedia, Inc. Sells $1,395,164 Worth of $EXPE - #Form4 #InsiderTrading - http://t.co/mMERvg9lWd
Large Void Bot
28 Aug 14 16:00:03
$EXPE Aug 26, CFO Sells 20833 (2685 Net) Shrs; Net: -1.40M; Acq'd: 23518 18.63/s; Disp'd: 20833 88.00/s
28 Aug 14 15:41:02
$VIIC ran up 720% Today in an explosive move! Our new picks are coming soon: http://t.co/EdxLh9u5Nx $KLAC $EXPE $HSIC
Eulalia Nickerson
28 Aug 14 11:50:00
$EXPE Expedia, Inc. to Participate in http://t.co/YIrA8lPr1T
Clair Voight
28 Aug 14 10:31:17
$EXPE Expedia Inc (EXPE) is Investing in Further Expansion: Dara Khosrowshahi http://t.co/2B8AWOgpdb
Financial Updates
28 Aug 14 08:19:12
$EXPE: Expedia Prices $500M Senior Notes, Gets Moody's Ba1 Rating http://t.co/GYdT1odumf http://t.co/uI3YohTFR6
28 Aug 14 07:57:46
$PCLN $TRIP $EXPE $OWW Priceline is the most attractive OTA based on valuation. http://t.co/b4zrxMO6C5
The Turtle Follower
28 Aug 14 06:53:35
NEW VIDEO: STRATEGY SESSION Aug 27th - $AAPL $ADM $AMT $APD $DIS $EQR $EXPE $FIS $HRB $LUV $RSG $TSO #trendfollowing http://t.co/WFPnTJjpOg
28 Aug 14 04:16:41
$EXPE:US 28Aug Negative News #Sentiment http://t.co/6CStSG3fwW #SP500
28 Aug 14 04:14:46
$EXPE:US 28Aug Negative News #Sentiment http://t.co/RTkWQUvygR #NASDAQ
Domonique Leahy
27 Aug 14 19:53:33
$EXPE Expedia, Inc. to Participate in t http://t.co/eRxr6ekBTq
The Turtle Follower
27 Aug 14 16:30:52
NEW VIDEO: STRATEGY SESSION Aug 27th - $AAPL $ADM $AMT $APD $DIS $EQR $EXPE $FIS $HRB $LUV $RSG $TSO #trendfollowing http://t.co/WFPnTJjpOg
Stock Market News
27 Aug 14 15:19:08
$EXPE: Expedia, Inc. Announces Pricing of Senior Notes Offering http://t.co/Lx5FRkMn5Y http://t.co/PdKno05DtU
The Mighty Wolf
27 Aug 14 14:55:28
$EXPE holding right above 10-day 86.48, normal action so far. http://t.co/lsZFkA0H7P
Michael J
27 Aug 14 14:12:45
RT @askslim: $PCLN headed lower, where is the target? Ask SLM 12ct @tastytrade. $OWW $TRIP $EXPE $$ $SPY
The Turtle Follower
27 Aug 14 11:30:58
NEW VIDEO: STOCK TRADE IDEA - We continue with the trade in $EXPE we put on a few weeks ago #trendfollowing #trading http://t.co/rydnUzDYo8
27 Aug 14 11:14:05
Top Tweets About $EXPE on 08/27/2014 http://t.co/7snLD9IPte
27 Aug 14 09:55:13
2 1/2 yrs ago, $TRIP separated from $EXPE, FAR under radar. Smart analyst called it 'unique asset' due to size/scope of audience
Market Int Center
27 Aug 14 09:51:34
Expedia $EXPE Trading Near $86.60 Support Level ( http://t.co/mJRjXfGk9N )
Biz News Pioneer
27 Aug 14 08:19:25
$EXPE: Expedia Q3 Hotel, Airline Trends Called 'Encouraging' http://t.co/oUYAj3w2z0 http://t.co/NCiKr6tAEz
The Turtle Follower
27 Aug 14 08:03:38
NEW VIDEO: STRATEGY SESSION - $AAPL $ADM $AMT $APD $DIS $EQR $EXPE $FIS $HRB $LUV $RSG $TSO #trendfollowing #stocks http://t.co/WFPnTJjpOg
Adam Vannoy
27 Aug 14 07:32:10
Exited $EXPE (trailing stop hit) and $UNH (profit target reached) this morning---I am only in $APC (at a LOSS) and $AAPL right now.
Clair Voight
27 Aug 14 07:30:21
$EXPE Expedia Inc (EXPE) is Investing in Further Expansion: Dara Khosrowshahi http://t.co/nG6pgnhdX1
ARK Web x.0
27 Aug 14 07:01:32
While #Travelocity, $EXPE seek growth only via their core business, $PCLN is expanding, diversifying its services. http://t.co/00JrKcvLLx
Paul Stiles
27 Aug 14 06:41:27
just sold $EXPE http://t.co/jLpFk8bSk4
The Turtle Follower
27 Aug 14 06:01:29
NEW VIDEO: STOCK TRADE IDEA - We continue with the trade in $EXPE we put on a few weeks ago #trendfollowing #trading http://t.co/kDzhXgT654
Charles McDonald
27 Aug 14 04:47:43
RT @TV_TradingIdeas: Extended price in a rising wedge $EXPE http://t.co/BZ1F4PtUOy
TV_Trading Ideas
27 Aug 14 04:47:33
Extended price in a rising wedge $EXPE http://t.co/BZ1F4PtUOy
Stock Headlines
27 Aug 14 04:19:10
$EXPE: Expedia takes a page out of Hotel Tonight’s design book with its new app http://t.co/Q9RfcQWsYR http://t.co/MdjD8zoLL3
27 Aug 14 04:16:04
$EXPE:US 27Aug Negative News #Sentiment http://t.co/nTMFNsLa3A #SP500
27 Aug 14 04:14:24
$EXPE:US 27Aug Negative News #Sentiment http://t.co/6MzwfwmDNH #NASDAQ
Lexie Cody
27 Aug 14 04:07:07
Expedia, Inc. to Participate in the D $EXPE http://t.co/yNQrjKdb7Q
Craig Bujnowski
26 Aug 14 18:28:08
Q&A with Battery Ventures about HotelTonight $EXPE $PCLN $TRIP http://t.co/apRnW2K0hD
The Turtle Follower
26 Aug 14 16:30:05
NEW VIDEO: STRATEGY SESSION - $AAPL $ADM $AMT $APD $DIS $EQR $EXPE $FIS $HRB $LUV $RSG $TSO #trendfollowing #stocks http://t.co/WFPnTJjpOg
Biz Headlines
26 Aug 14 14:19:08
$EXPE: Expedia Prices $500M Senior Notes, Gets Moody's Ba1 Rating http://t.co/UKcFtm6j11 http://t.co/ub7Zf5oFox
26 Aug 14 13:04:09
$EXPE Expedia, Inc. to Participate in the Deutsche Bank Technology Conference From our Stock News Alerts App
26 Aug 14 13:03:17
$EXPE - Expedia, Inc. to Participate in the Deutsche Bank Technology Conference http://t.co/zh80od6i0o
26 Aug 14 13:03:12
$EXPE - Expedia, Inc. to Participate in the Deutsche Bank Technology Conference http://t.co/cIY298RuGL
BV Services
26 Aug 14 13:02:08
$EXPE Expedia, Inc. to Participate in the Deutsche Bank Technology Conference.. http://t.co/P9ugJCQwzb
jeff george
26 Aug 14 10:10:13
@Lebeaucarnews This $AAL news should be a big positive for $EXPE and $PCLN.
jeff george
26 Aug 14 09:43:53
@jimcramer The $AAL news that they are pulling out of $OWW would be a positive for $PCLN and $EXPE
jeff george
26 Aug 14 09:32:05
@Lebeaucarnews What does this mean Phil, positive for $PCLN negative for $EXPE as they might be next?
Market News Desk
26 Aug 14 07:19:11
$EXPE: 'Craigslist of China' http://t.co/LydcbHYbXo Expects Q2 Revenue Leap http://t.co/5ZCYM53IdW http://t.co/osECqiT04T
26 Aug 14 07:02:05
taking profits today, 25%-40%. $DDD $HPQ $ORCL $EXPE $NTAP. Nice Morning so far. Just got long $BIDU. Trading is fun.
Market Int Center
26 Aug 14 06:40:26
Expedia $EXPE Showing Support Near $86.82 ( http://t.co/TGNpkeivrB )
The Turtle Follower
26 Aug 14 06:24:38
tom renna
26 Aug 14 05:27:20
26 Aug 14 02:21:56
$MCET closed up 57% yesterday. Platinum Members once saw 235% gains on it, in 1 week: https://t.co/9OxPSiatev $KLAC $EXPE $HSIC
By  +Follow December 9, 2013 1:23PM



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