Introduction:
The difference between hit confirming and not hit confirming 1,2,1 is a -12 on block frame penalty. While this doesn't seem like a huge problem, quite a few characters get wall splat off 10-12 frame punishers (i.e. Heihachi, Jin, Lili, Lars, etc.) and losing your momentum at the wrong end of a Mishima 1,1,2 is not the way to win matches.
Learning the Basics:
Simply put you'll be using the 1,2 input/animation as your confirm window and be using the initial 1 as CH confirm check. You're looking for counter hit on the initial 1 and this can be anything from a visual clue (a brief part of their animation immediately interrupted) to an audio clue (the animation is nearly invisible because you interrupted them early in the attack, but the “kiyah!” can be heard). The input window isn't very large, but large enough to confirm CH before the final 1 must be input.
First and foremost hit confirming CH 1,2,1 with greater than 95% accuracy is no small feat and you shouldn't expect to be flawless right away. Start small, practice counter hit confirming on basic frame traps such as d+1 and b+1+2, once you get a feel for the animations you can graduate to the next level.
Hit confirming 1,2,1 in the middle of the field is a little trickier, but the same rules apply. You'll be looking at the initial 1 for CH, if you interrupt them, finish the string off. It takes a little practice, but in the long run you'll come out ahead.
Things to Look Out For:
Stances and transitions are very hard to distinguish from opponent attacks, as such it's very important to know your opponent's stances before the match begins. Finishing a 1,2,1 thinking it's CH when they ended up dropping into a stance without attacking, will cause you to lose whatever momentum you had. There are certain stances that immediately will be followed by an attack (e.g. Lars SE and DE) and in this case alone will 1,2,1 work most of the time, otherwise characters like Anna and Lei usually won't so be careful when fighting them.
Learn From Your Mistakes!
There have been plenty of times where I'll 1,2 and see the CH after the fact, but because I didn't initially see CH or pressed the final 1 too late, I won't KND them. This isn't necessarily a failure because it allows me to realize that I could have finished the 1,2,1 string. What you don't want happening is using 1,2 and it hits CH and then not recognizing the attack was CH, as you'll learn nothing from this. Instead always be on the look out for your mistakes and try to improve on them. You might not fix them today but if you notice your mistakes enough, you'll fix them eventually.
1,2,1 Traps:
Any attack (or in some cases, strings) that leaves you with +frames on block at near 0 range can be constituted as a 1,2,1 trap. There are a few attacks that are +frames on block that do not always leave the opponent at 0 range, therefore are more viable with the opponent's back to a wall.
Anywhere in the stage d+1
Anywhere in the stage b+1+2
Anywhere in the stage b+4,2,1
Anywhere in the stage 1 check
With the opponent's back to the wall f,f+3
With the opponent's back to the wall iWR 2