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Understanding the AB=CD Pattern
In my opinion, there are several mental obstacles that impede the understanding of the AB=CD pattem. When the AB=CD is developing, it is difficult to believe, especially when the trend in place seems to be very strong. In our bullish example, as the CD leg is selling off, it might become difficuh to perceive the buying opportunity because it seems like the downtrend will continue. As the selling continues, our brain will interpret lower prices as a weaker stock. Conversely, when a bearish AB=CD pattem develops, we naturally perceive higher prices as strength. So, when the stock continues to climb, we get greedy, and it is very easy to get caught up in all of the money we are making. Unfortunately, the pattem is telling us to sell. Therefore, it is important to train your brain to think within a defined framework of AB=CD and to execute trades accordingly.
Another mental obstacle of the AB=CD pattem is that it just seems too simple. I know that when I first began employing the AB=CD technique in my trading, I had a difficult time believing that price action would act this way. I had to witness many examples of the AB=CD pattem before I truly believed it. Even after I believed that the pattem worked, I had to mentally reinforce the AB=CD framework.
It was not until I actually wrote on the stock charts the AB==CD pattem that I began to execute at point D. For example, if I was looking to buy, I would draw the pattem and write: "Buy at D!" In fact, I would draw the pattem on a piece of paper, over and over again! Also, as I was beginning to ingrain the pattern in my brain, I repetitively said to myself: "AB=CD, AB=CD, AB=CD!" Amazingly enough however, there were even times when I would write the AB=CD pattem on the stock chart and still jump in before the pattem was complete. And then, the stock would bounce almost exactly off the completion point. I guess it was not until I was bumed by these mistakes that I truly leamed the importance of the AB=CD fi-amework. Therefore, I cant emphasize enough die importance of ingraining this pattem in your brain.
One of the most important reasons to think in an AB=CD framework is because it gets you to buy low and sell high. It is incredible how such a simple pattem can be very difficult to execute. But, I guarantee, as for my own experience, not thinking within the AB=CD framework has cost me money - lots of it! So, resist it if you must, but you will not begin to be consistently profitable until you utilize the AB=CD pattem.
When analyzing potential reversal zones, the AB-CD is one ofthe most important numbers to consider. In fact, I believe the completion of an AB=CD pattem within a harmonic reversal zone is a minimum requirement for a trade signal. Although this has kept me out of some very profitable trades, I usually will not enter a trade unless an AB=CD is present. I continually have observed the pattem gauge price action accurately, by indicating the specific areas to examine. In addition, a potential reversal zone that includes an AB=CD with other Fibonacci calculations provides a very significant area for a high probability trade opportunity.
Once this pattem is identified, it is important to calculate the 1.27 or 1.618 projection of the leg. Usually, one of these numbers will be close to the completion point of AB=CD. So, it is essential to examine this area for a potential reversal. Although the AB=CD seems very simplistic, it works out more than it does not. Therefore, it is extremely important to utilize this framework as the fundamental means of identifying potential trade opportunities.
Alternate Projections ofthe AB = CD Pattern
Although the AB=CD pattem is a great set-up when each leg equals the other exactly, there are many situations where altemative Fibonacci calculations are required to clearly define the potential reversal zone. Although there might be a clear pattem developing, it is not uncommon for the AB=CD to be unequal. These altemate projections should merely complement an area that possesses other harmonic numbers. As I will discuss in the section on pattems, these altemate projections are effective in defining potential reversals.
1.27 or 1.618 AB = CD
When the equivalent AB=CD completion point is blown out, the 1.27 or 1.618 can be used to determine other potential reversal points. These altemate calculations are not difficult to calculate. Depending upon which number is used, multiply the AB leg by either 1.27 or 1.618 and project that distance from point C. This calculation should converge with a Fibonacci projection - usually a 1.618 or 2.24 - ofthe leg.
Alternate Bullish 1.27 or 1.618 AB=CD
The bulHsh alternate projection is useful to gauge other potential reversal areas for price moves that exhibit a clear AB=CD pattem. The CD leg usually will experience an extended decline that reverses off the 1.27 or the 1.618 ofthe AB leg.
ab = cd 1.27ab=cd
bullish 1.27 or 1.618 ab = cd
buy at point d!
When other Fibonacci projections are present with an altemate completion point, you should watch this area closely for a potential reversal. Lets look at an example ofthe 1.27 altemate projection.
The following long-term weekly chart of Haliburton clearly possessed a harmonic set-up around 30. At this point, you might be wondering why the exact AB=CD was not considered for this set-up? The exact ABCD was projected to complete at 37 1/4. Clearly, Haliburton was experiencing extreme selling pressure in this area, as evidenced by the abnormally large price bars. However, there were several other harmonic calculations that converged near 30.
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