# 123 Formation as Trend Continuation Setup



## persama (28 June 2005)

I'm hoping to set the ball rolling for a discussion of trading with 123 formations, after there's been some interest expressed in this method recently in other forums.

These 123 formations can be traded on virtually any instrument and any time-scale. Personally I use these setups to trade US stocks (mainly Nasdaq stocks) by using daily charts.

You can always yahoo for "123 trading system" to look for more information about the 123 formations OR alternatively go to this link for an overview of the system. 

I use a derivation of 123 system. Only I trade these setups for trend continuation instead of trend reversal as suggested by the original idea.

Let's hope we can get some interesting discussion going.


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## persama (28 June 2005)

Watchlist for Jun 27, 2005

Potential 123 trades:

GOLD, NDAQ, VPHM


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## tech/a (28 June 2005)

This is probably the first and most basic of technical setups one would be taught.
I certaintly remember it as the first introduced to me when doing the "Securities Institute Course".

It ofcourse follows the technical principal of finding an issue that makes a Higher low AND then a Higher high.

The general term "Very High success rate" I think is misleading---that in itself suggests 70-80%---while not actually given as a % like any technical setup over a VERY LONG period and a wide universe of stocks---unless other filters were included 50/50 success rate is more likely.

How does this differ from "The ROSS HOOK"?

What timeframe are you using for your setups?

In the Gold Chart below which is daily I can see a double bottom which held and also the 123 pattern which has also played out---Not a setup?
Can also post the other 2 charts


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## RichKid (28 June 2005)

persama said:
			
		

> ..... go to http://www.stoplosing.com/overview.html for an overview of the system.
> I use a derivation of 123 system. Only I trade these setups for trend continuation instead of trend reversal as suggested by the original idea.




Great idea Persama, I'm certainly keen on this, here's the material from that link above, the graph referred to is attached below:


> *The 123 System *
> This is an incredibly powerful yet simple pattern that can turn your trading around. It is effective with any market and has a very high accuracy rate. This is without a doubt one of the best chart set-up patterns you will see.
> 
> - To spot the potential market bottom of any securities price, watch for a new lowest price in the current Downswing (point #1).
> ...


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## RichKid (28 June 2005)

tech/a said:
			
		

> How does this differ from "The ROSS HOOK"?
> 
> What timeframe are you using for your setups?
> 
> Can also post the other 2 charts





Also seems similar to the ABC trade set up used via swing charts by people like Safety in the Market (www.sitm.com.au), wonder if it's the same thing?

Nice to see the stop loss placement described as well in that link Persama gave us.


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## persama (28 June 2005)

> How does this differ from "The ROSS HOOK"?



A Ross-hook is the first failure by prices to make a higher high subsequent to the breakout of a 1-2-3-low formation (or a lower low subsequent to the breakout of a 1-2-3-high formation), or the first failure by prices to make a higher high subsequent to the upside breakout (or a lower low subsequent to the downside breakout) of any type of consolidation area, e.g. ledge, congestion or trading range.

That means a Ross-hook breakout is a 'delayed' breakout signal if compared to the breakout of a 123 formation. And 'The Ross Hook' also take care about more  complex formations such as ledge, congestion and trading range.


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## RichKid (28 June 2005)

Persama, 
Are you hoping to show some live trades of international markets using your method? This is one of the few ways in which it can be evaluated, a few of us here do that with explanations of the set up and trade/money management. If not, and if this is just a theoretical look at the method, I may move this thread to the 'Trading Tips/Strategies' forum. You can post charts here as well showing your trades and the application of your methods, there are a few people here who trade international indices and stocks so there will be interest in a practical application. Let me know.
Thanks!
RichKid
moderator


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## persama (28 June 2005)

Hi RichKid,

I am currently paper trade these setups, no real money yet.   

However I'll post the watchlist and a brief explanation on those setups every trading day but with no promise.

Please feel free to move this thread to the most suitable forum.


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## persama (28 June 2005)

Watchlist for Jun 28, 2005

Potential 123 trades:

DSTl, GOLD, ILMN, LIFC, UPCS

Updates:

NDAQ - Broke Point #2 (19.50). Recommended Initial Stop at 17.74

VPHM - Lower High is formed. Trade abandoned.


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## tech/a (28 June 2005)

You may find the addition of the R/H a valuable filter in your usage of the 123 setup.

This maybe helpful.

http://tradingeducators.com/newsletters/chartscan/vol_11/

Then download the trading phylosophy PDF file  51 pages of great stuff.
will bring possibly a new dimension to 123 setups and trading them.


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## Mofra (28 June 2005)

RichKid said:
			
		

> Also seems similar to the ABC trade set up used via swing charts by people like Safety in the Market (www.sitm.com.au), wonder if it's the same thing?
> 
> Nice to see the stop loss placement described as well in that link Persama gave us.



I used the SITM pack years ago, and the ABC trade setup & the 123 setup are very similar - the major difference is the distance between 1 & 2 (A & B) is known as the range and the SITM basic plan looks at percentages of the range to guage a likely exit point. It also has an extra entry parameter, that the retrace to point 3 (C) is less than 50% of the range (also keeps the fibonacchi fans happy).

To be honest, I believe the fact that it is a written mechanical plan and enforces a stop loss is a greater contibuter to success than any perculiarities to the strategy. If you simplify it, you're really just entering an uptrend on a ST pullback which many strategies also attempt to do.

Cheers


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## tech/a (28 June 2005)

*Mofra*

It appears you have turned on the light---(atleast in your room!)


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## persama (29 June 2005)

Watchlist for Jun 29, 2005

Potential 123 trades:

ASFI, CKCM, DGIN, ENTU, ILMN, ITRI, LIFC, LUFK, OTIV, PGIC, SMTS, SPNC, STLW, UHCO, UPCS

Updates:

DSTI - A lower High is formed. Trade abandoned.

GOLD - A lower High is formed. Trade abandoned.


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## persama (30 June 2005)

Watchlist for Jun 30, 2005

Potential 123 trades:

ASFI, CKCM, DGIN, ILMN, ITRI, KAMNA, LIFC, LUFK, OTIV, PGIC,  SPIR, STLW, THOR, UHCO, WLSN

Updates:

ENTU - Close <= $5, scratch from the watchlist.

SMTS - A lower High is formed. Trade abandoned.

SPNC - Broke Point #2 ( 6.41 ). Recommended Initial Stop at 5.77

UPCS - Broke Point #2 ( 8.18 ). Recommended Initial Stop at 7.58


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## tech/a (30 June 2005)

Persama

SPNC is fine.

But Im having trouble seeing a 123 in this.


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## persama (1 July 2005)

tech/a said:
			
		

> But Im having trouble seeing a 123 in this.



Your chart is not up-to-date.

Go to http://stockcharts.com/def/servlet/SC.web?c=spnc for the latest chart!


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## tech/a (1 July 2005)

Ahhh Quite correct.

As its a bourse I dont trade in I only upload weekly.

Much clearer and much nicer to look at.I'll upload before opening mouth---

The inside day after the breakout day is common.
What timeframe do you trade?
Do you trail a stop behind the lows as they are confirmed?


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## persama (1 July 2005)

Watchlist for Jul 01, 2005

Potential 123 trades:

ASFI, CAND, ITRI, LUFK, OTIV, PGIC, THOR

Updates:

CKCM, DGIN, ILMN, LIFC, SPIR, STLW, UHCO, WLSN - Scratch from the watchlist. A lower High is formed.

KAMNA - Broke Point #2 ( 18.13 ). Recommended Initial Stop at 16.50

LUFK - Broke Point #2 ( 36.20 ). Recommended Initial Stop at 33.90


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## tech/a (2 July 2005)

*What timeframe do you trade?
Do you trail a stop behind the lows as they are confirmed?*


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## persama (4 July 2005)

tech/a said:
			
		

> *What timeframe do you trade?
> Do you trail a stop behind the lows as they are confirmed?*



I am using daily charts to trade.

Trail a stop behind the lows is supposingly the correct exit strategy but occasionally I use my gut-feel to exit....


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## persama (4 July 2005)

Watchlist for Jul 04, 2005

Potential 123 trades:

ASFI, CAND, ITRI, OTIV, PGIC, THOR


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## RichKid (4 July 2005)

persama said:
			
		

> Watchlist for Jul 01, 2005
> Potential 123 trades:
> LUFK - Broke Point #2 ( 36.20 ). Recommended Initial Stop at 33.90




Just thought I'd post these charts as I was checking them as it is much easier to understand the trade graphically for me- LUFK also has one of those 'hindsight' trades in May for the 123 method (the long term chart confirms that it was still a trend continuation- as required by Persama's method (also note the blue EMA which confirms it)). Charts are 1 mth and 3mths.


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## RichKid (4 July 2005)

Persama,
Do you use the 50 & 200 ema in your trades? eg to find a 'continuation' ie when 50 is over 200. That way you could develop a mechanical system I guess so that it filters some candidates for you. Just wondering as those ma's were in one of your charts.

Also in terms of the timeframe tech refers to, do you look to trade on a weekly basis (ie most trades are closed within a few weeks) or do you just let the trade run as long as it's not hitting the trailing stop?


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## persama (6 July 2005)

Watchlist for Jul 06, 2005

Potential 123 trades:

AMTD, ASFI, CAND, CTHR, DCGN, ENTU, ITRI, KOPN, OTIV, PGIC, SBAC, THOR


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## persama (6 July 2005)

RichKid said:
			
		

> Persama,
> Do you use the 50 & 200 ema in your trades? eg to find a 'continuation' ie when 50 is over 200. That way you could develop a mechanical system I guess so that it filters some candidates for you. Just wondering as those ma's were in one of your charts.
> 
> Also in terms of the timeframe tech refers to, do you look to trade on a weekly basis (ie most trades are closed within a few weeks) or do you just let the trade run as long as it's not hitting the trailing stop?



Currently I am not using ma as my filter but am thinking of to 'borrow' Stan Weinstein's idea to refine the system....still backtesting the new idea.


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## persama (7 July 2005)

Watchlist for Jul 07, 2005

Potential 123 trades:

ASFI, CAND, CTHR, DCGN, ENTU, ITRI, PANL, PGIC


Updates:

KOPN - Broke Point #2 ( 5.72 ). Recommended Initial Stop at 5.01

SBAC - Broke Point #2 ( 14.32 ). Recommended Initial Stop at 13.20

THOR - Broke Point #2 ( 15.93 ). Recommended Initial Stop at 15.02

AMTD - Lower High is formed. Trade abandoned.

OTIV - Lower High is formed. Trade abandoned.


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## persama (8 July 2005)

Watchlist for Jul 08, 2005

Potential 123 trades:

ASFI, CAND, CRXL, DCGN, ENTU, PANL


Updates:

CTHR - Lower High is formed. Trade abandoned.

ITRI - Lower High is formed. Trade abandoned.


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## DTM (8 July 2005)

> ITRI - Lower High is formed. Trade abandoned.




I think ITRI's ready to go up now because it has been consolidating without moving down too much.    

Watch it move.


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## DTM (9 July 2005)

DTM said:
			
		

> I think ITRI's ready to go up now because it has been consolidating without moving down too much.
> 
> Watch it move.




There's your rocket.  Up 78 cents within the first hour and half of trading.  Just happened to be up making baby's bottle.  

Hope you caught that one.....


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## MARKETWAVES (9 July 2005)

*123*......  FORMATIONS

   HAS  ITS  ORIGINS  TIED    to      *ELLIOTT  WAVES  ....*

  The  *ABC  *  SECTION  OF   an  ELLIOTT  WAVE  formation  is  identical ....



  The  point  labeled  *# 3 *  is  a  retracement  level off  of  the  distance between point number *#1 *  and  point *# 2 * 
  IN WHICH THE  RETRACEMT  LEVEL  IS  A  FIBONACCI NUMBER   ......

  EXAMPLE 50% , 618 % 786 %   ,,,,,, 

 ALWAYS  RETRACEMENTS ARE PRESENT   .........

…………….Please, don't give me credit for pointing out these lines ... I have learned them form studying the work of Fibonacci Retracements and Elliott Waves ..... These lines work well only when they are tied to certain Elliott Wave structures and certain Fibonacci Retracement levels ..... outside of this they become less reliable...... *a whole lot less reliable .*
This is exactly the reason why you could never back test a particular stock or commodity for these lines without these 2
basic theories of understanding. *NOT ALL CHART PATTERNS ARE TRADEABLE .*
(This depends on your trading strategy or trading style )

ALWAYS REMEMBER ….  

What makes a market place is all of our diffrences of opinions .
------- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
It is far more difficult to *Exit a trade * than to* Enter a trade .... * I am sure that you have heard that said before ,,,

THIS IS WHY ,

*When making trade it just as important to have an idea where you want to exit as it is to place a stop to protect yourself from a move against you .
*  ( THIS IS A PEARL OF WISDOM )


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## persama (11 July 2005)

Watchlist for Jul 11, 2005 

Potential 123 trades: 

ASFI, BELM, BMRN, CAND, CRXL, CWTR, CYBX, DCGN, ENTU, HITK, HLEX, NGAS, PANL, RSTO, TRGL


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