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Chapter 17, Part II. Harmonic Numbers and AB=CD pattern. Page 6

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    AB=CD Pattern

    The old wisdom tells that as some tool is simpler in nature, it more useful. That’s like the AB=CD pattern. In fact, this pattern could be seen most often on all markets and all time frames. Also usually it becomes a part of a complicated patterns such as 3-Drive, Gartley “222” and Butterfly. That’s why it’s very important to fully understand it.


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    The structure of this pattern is relatively simple. It consists of three legs – the initial AB move, CD retracement from the AB move and a continuation or extension CD. Although I draw CD as equal to AB, it is not always like that. The BC move could have different depth than the AB leg.

    BC retracement leg usually shows move to one of the Fib support/resistance, depending on Buy/Sell pattern. The most often levels that stop BC move are: 0.382; 0.5; 0618; 0.786. The depth of retracement, i.e. BC leg has very significant meaning itself. For instance BC move just to 0.382 level usually happens on strong thrusting market, and could give early notification that probably CD leg will be greater than AB. While retracement to 0.786 level is vice versa – tells that probably CD leg will not exceed AB.

    When market continues move outside point “B” – CD leg begins to form and we expect that price will reach pattern’s completion point at “D”. During development of CD leg we should watch for some warning signs that could force us to skip this trade or wait for additional confirmation – we will talk about them a bit later, but now let’s specify parameters that could invalidate this pattern:

    1. BC leg can’t exceed AB leg. Other words retracement could not be greater that 1.0 of AB;

    2. BC can be 1.0 retracement of AB and in this case AB=CD pattern is valid, although this is rare pattern that looks like double top or bottom, but it’s valid;

    3. D must exceed B so that it could be completed in point D and to be a valid AB=CD pattern.
    First of all keep in mind, that AB=CD pattern will have equal AB and CD legs only in 30-40% of cases. So, do not be deceived by its name. Most times CD leg will not be perfectly symmetrical to AB. Since we talk about “Harmonic patterns” the harmony term has very significant meaning for us. And this harmony is not only in term of price swings but in time also.

    Since AB and CD leg could be different let’s how it could happen:

    1. CD leg is an extension of AB anywhere from 1.27 to 2.0, 3.618 or even greater (difference in terms of price).

    2. CD leg could be as steeper or flatter than AB (difference in terms of time).
     
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