What it looks like
In a falling market, mark the lowest swing low as point 1. Price bounces to a swing high, point 2. It then falls again but stops above point 1, forming point 3, a higher low. The pattern completes when a candle closes above point 2. The size of the bounce is the distance from point 1 up to point 2.
What it means
A downtrend is a chain of lower lows and lower highs. Point 3 is the first time sellers fail to make a new low, and the close above point 2 is the first time buyers beat a high in the fall. Those two failures together are the plainest picture of a trend turning. It does not say how far the new move will go, only that the old pattern of lower lows has broken.
How to trade it
- 1
Label point 1 (the low), point 2 (the bounce high) and point 3 (the higher low).
- 2
Confirmation: a candle closes above point 2.
- 3
Entry: buy at that close.
- 4
Stop: below point 3. Example on US30: point 1 at 46,600, point 2 at 46,850 (a 250 point bounce), point 3 at 46,700. Buy the close at 46,860 with the stop at 46,680, a 180 point risk.
- 5
Target: the bounce size from the break, 46,850 plus 250 points, about 47,100.
A close below point 3, the higher low.
Where it works best
After an extended fall into a known support level on the 1 hour to daily charts, where the higher low forms at that level.
WickSpeak finds 1-2-3 bottoms automatically and names the pattern on the candles that made it. The note explains what it is, how to trade it and that a close below point 3 proves it wrong. In Playbook you can use it as a condition in a play, alone or alongside other patterns and indicators (any of the 146 patterns can be a condition), and backtest it on past candles with your own costs.
Common mistakes
- Buying at point 3 before the close above point 2 has confirmed it.
- Labelling tiny wiggles as points, so the pattern is noise rather than a real turn.
- Expecting a full trend reversal; the pattern only targets the size of the bounce.
Related patterns
Questions traders ask
What is the 1-2-3 pattern?
It is a three point reversal: a low, a bounce and a higher low, confirmed when price closes above the bounce. In a downtrend it is called a 1-2-3 bottom. The mirror image at the top of a rise is a 1-2-3 top.
Where do you enter a 1-2-3 bottom?
On a close above point 2, the high of the bounce. Buying at point 3 is earlier and cheaper but has no confirmation that the turn is real.
What is the target for a 1-2-3 bottom?
The usual target is the size of the bounce from point 1 to point 2, added to the break level. After that, use the next resistance level.
Is the 1-2-3 bottom the same as a change of character?
They describe the same idea: a falling market makes a higher low and then breaks a high. Change of character is the smart money concepts name; 1-2-3 bottom is the classic price action name.