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[start]                                   [ 35 ]                                                            
discovering these pattems is the same as solving a crossword puzzle. The words that are the most familiar will be the easiest to find. But, the more complex words might take some time before they can be found. So, it is important to give yourself some time to decipher these pattems in stock charts. But, the more you study the pattems, the more they will begin to "jump out" at you.
These pattems are the very basic frameworks to help identify potential trade opportunities. The pattems will indicate the general area to examine for a trade set-up. I have observed many stocks that reverse after exactly hitting the completion point ofa pattem. However, the most important concept of pattem recognition is to define the specific area where a stock can reverse. Ifa stock possesses several harmonic calculations that converge within a few points, a reversal is highly probable.
After you develop some experience, you will begin to "tmst" the pattems more than any other information. In my experience, when I initially utilized these techniques, I frequently resisted to execute at the numbers. For example, if I was long a stock, I usually held on for a greater profit, even if I knew that a pattem was indicating resistance. However, I quickly leamed that such thinking costs money. As I employed these techniques effectively, my trading and understanding ofprice action improved tremendously.
It is important to view these patterns as reliable signposts of future price action. They will guide you through very confusing markets. Quite often, the patterns will indicate a potential opportunity when the news in the media suggests otherwise. It has been my experience that the pattems are the most reliable indicators of price trends, and they are my fundamental basis for identifying trade opportunities.
The most basic pattem is the AB=CD. In this pattem, the A to leg is the first price move. After a brief retracement firom point to point C, the pattem will complete the to D leg, which is the same length as AB. Simply, after the AB and legs have been established, you project the AB length from point C.
The AB=CD pattem was first described by H.M. Gartley in his book, Profits in the Stock Market, published in 1935. This pattem also has been described as a lightning bolt pattem. But, for these purposes, it will be referred to as the AB=CD. This simple framework is the basis for pattem recognition of stock prices. It is imperative to study price charts that exhibit this basic pattem, as tiie framework for entry and exit strategies because they accurately indicate profitable trade opportunities.
Although the price action will not always be exactly equivalent, the AB=CD legs usually will be close enough - within a point or two - to determine the reversal points. Sometimes, this pattem will be exact. I usually wait for the CD leg to at least equal the AB leg. Although, it is not uncommon for the CD leg to slightiy exceed the length of the AB leg, the most important concept is to study the area where these two price legs are closely equivalent.
The price legs should be generally symmetrical possessing a consistent slope. It is important to study the time duration of each leg. The AB and CD legs should be approximately the same length of time to complete. For example, if the AB leg is ten price bars, the CD leg should require fhe same lengtii oftime. Although this is an ideal situation, the time duration does not need to be exact. If the price legs are close, the pattem is still valid.
I believe that this pattem is most effective because it requires that you "buy low and sell high," I know that such price action might seem oversimplified, but this price pattem occurs frequently. If you train your eye to notice this pattem, it will begin to jump out at you. The most important aspect of this pattem is to look for two price legs that are distinct. Once you study several examples, you will be able to decipher quickly AB=CD pattems in other stock charts.
In the bullish illustration, point A is the highest point and point D is the lowest. Each price leg should be distinct with a symmetrical slope down.
bullish ab = cd
buy at point d!
It is difficult to observe this pattem form on a price chart and believe that a buying opportunity exists. Once the CD leg breaks down past point B, it seems as if the stock is weak. Although it may be difficult to perceive, the pattem is actually indicating an excellent buying opportunity.
I know from my own personal experience that executing my trades according to this pattem was difficult because it required that I buy a stock
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