Definition of '123 Reversal'
The 123 reversal strategy is based on these 2 simple patterns.
(There are other enhancements to this pattern which take into account the price action
leading up to this.)
Rules for the sell signal:
Bar 2 has a higher high and higher low than both of bars 1 and 3.
Bar 1 is a green bar (close higher than open).
Bar 3 is a red bar (close is lower than open).
Rules for the buy signal:
Bar 2 has a lower low and lower high than both of bars 1 and 3.
Bar 1 is red (close is lower than open).
Bar 3 is green (close is higher than open).
In 2006 the trading team at Ra2D
back tested this trading strategy against the E-mini S&P500
on a number of different time frames and concluded that it does not work in this market on the time frames that they tested. Time frames used were common ones such as 1, 3, 5, 15, 30, 60 minutes.
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