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Chapter 17, Part II. Harmonic Numbers and AB=CD pattern. Page 7

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

    Aug 28, 2009
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    Pipruit: I’m confused, Sir. If there could be such differences, how we can trade it at all?​

    Commander in Pips: As usual solution is hidden in details and nuances. The first important issue is the development of the BC leg, second – price action after the C point has been formed. This will allow to you make right decisions about potential AB=CD pattern. But don’t interrupt me, I will tell you about that. Then you can ask your questions.

    Pipruit: Sorry. Please go on.​

    Commander in Pips: So, there are some signs in the CD leg that give us a clue will CD leg be an expansion of AB or not:

    1. If right after the C point, a gap takes place in the direction of D point or somewhere on the way to D point, it could be an early warning sign that probably the CD leg will be extension of AB;

    2. If right after C point, a long ranged bar (twice normal size) takes place in the direction of the D point or somewhere on the way to the D point, it could be an early warning sign that probably CD leg will be extension of AB;

    3. If Gap and/or long ranged bar occur right near the D point (assuming that AB=CD) this is also the sign that CD could be extension of AB;

    4. Ideally AB should be equal to CD as in price as in time. So, if AB leg forms in 10 bars so the CD leg also should form in 10 bars. This gives AB=CD pattern strength and increased odds that the market could show reversal at the D point – temporary or permanent;

    5. If the CD leg has greater slope than AB, then probably it could be a 1.27, 1.618 or even greater extension of AB leg;

    6. Also keep an eye on BC depth not as itself but in comparing with the AB move. If, say, AB up move takes 20 bars and BC takes 10 and has reached only 0.382 of AB - it tells that the market is absorbing the sell-off at high price and when sellers pressure will weaken – market could show a solid up thrust – the CD leg could be extended leg.

    7. If BC reaches 0.618 or 0.786 then probably there is a good chances that AB and CD will be equal.

    To calculate target of AB-CD pattern you may apply the following formula:

    D-point = C + (B-A) x extension ratio​

    Extension ratio could be one of the 1.0; 1.272; 1.618; 2.0; 2.24; 3.0; 3.168 etc. Usually 1.272; 1.618 and 2.0 are used.

    Now attention – very important rule:

    “You should treat an as AB=CD as any harmonic pattern from probability standpoint but not from certainty. It means that applying a solid money management and stop losses are a must here. It’s needless to say about having a deep understanding of the pattern itself”
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