Confirming 123 Reversal Patterns with Polarized Fractal Efficiency

Summary

This strategy combines a three-bar 123 reversal pattern with the Polarized Fractal Efficiency indicator. The pattern uses recent closing-price changes and Stochastic fast and slow lines to identify potential turns. PFE is used as a price-trend efficiency filter: readings above or below configurable bands indicate opposing directional states. A position is opened only when both components agree; otherwise the strategy closes positions and remains flat. The parameters include Stochastic settings, PFE lengths and bands, and an option to reverse trades.

The document argues that confirmation may filter some isolated signals, but it provides no measured results to establish improved accuracy or profitability. Its source describes the 123 conditions as requiring two successive closes in one direction followed by a reversal, alongside Stochastic constraints. Risks include faulty factor signals, parameter sensitivity, and frequent stop-outs during short holding periods. It recommends testing volatility-based exits and reducing reversal trades in strong trends.

Key ideas

• The entry rule requires the 123 pattern and PFE to indicate the same direction.
• Stochastic conditions help define the 123 reversal signal, while PFE thresholds classify directional efficiency.
• Disagreement between the two components leaves the strategy flat.
• The document provides no performance evidence, and parameter sensitivity and stop-outs remain concerns.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.