The ABCD Structure - Harmonic Trading Patterns
Saturday, August 24, 2013
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Harmonic trading uses Fibonacci relationships to spot potential reversal points in price activity. There are a variety of harmonic patterns that have been discovered - relatively recently, in some cases. The patterns are useful in the ways they help to identify buying and selling opportunities in any market and on any time frame.
The patterns can be used for a variety of strategies, including intr-day, swing, and position methods. An additional advantage of harmonic trading is that is allows traders to determine risk vs. reward ratios before trades are placed. With the harmonic method, the strongest trading signals occur when the harmonic structures coincide with other patterns (either on the same time frame or with those seen on multiple time frames).
The ABCD Structure
The simplest of these structures is called the ABCD pattern, where high probability trading setups occur as the pattern completes at the D point. Both the bull structure and the bear structure can be seen in the examples below:
Without looking at the specific Fibonacci relationships, we can see that at each reversal point (at A, B, C, and D) prices make a significant high or low, creating three coinciding swings in price and forming a dominant trend, comprised of three distinct “legs”. These legs are classified as leg AB, leg BC, and leg CD. The BC leg is a corrective retracement, while the dominant trend is characterized by the behavior of the movement seen in legs AB and CD.
Looking at the Fibonacci levels within these legs, we can see that leg BC retraces to 0.618 of the move seen in leg AB. The following movement at leg CD should be equal to the 1.272 Fibonacci extension of the move seen in leg BC. Traders should wait until the move reaches completion at point D before entering into a new position, as this is the main reversal area. These are the most commonly watched Fibonacci levels with respect to the ABCD structure but there are variations in these, which will be described below.
Additional Characteristics
In addition to the characteristics described above, the ABCD pattern is seen as ideal when the length of leg AB is equal to the length of leg CD. This is true not only for price, but also for time, as the duration of leg AB should also be equal to that of line CD. This congruity allows the pattern to reach full cohesion.
Pattern Variations
One key point to remember, however, is that technical analysis in the forex market is not an exact science. Because of this, there are variations that can be seen with the ABCD harmonic pattern. Alternative structures allow the BC leg to retrace 0.786 of CD or to extend to 1.618 of BC.
There are three general ways the ABCD pattern can unfold: The AB=CD pattern occurs when legs AB and CD coincide in terms of price and time. The “classic” ABCD pattern is seen when the Fibonacci relationships match the above criteria but the price legs are not equivalent in terms of price and time. Finally, the ABCD Extension pattern is seen when the time of leg CD is 1.272 (or 1.618) times longer than AB, and the price movement of CD is 1.272 (or 1.618) times longer than what is seen in AB.
Conclusion
The basis of the ABCD pattern is the Fibonacci relationships seen in the proportions of legs AB and CD. These movements allow us to identify an approximate area for where the overall structure will complete. Because of this, coinciding patterns (multiple harmonic patterns on one or multiple time frames) will tend to increase the probability that the identified structures are valid and that reversals will follow.
To contact Ayman Khlifat , email Aymanfxsignals@yahoo.com
More updates on Twitter
Follow @aymankkhlifat
Harmonic trading uses Fibonacci relationships to spot potential reversal points in price activity. There are a variety of harmonic patterns that have been discovered - relatively recently, in some cases. The patterns are useful in the ways they help to identify buying and selling opportunities in any market and on any time frame.
The patterns can be used for a variety of strategies, including intr-day, swing, and position methods. An additional advantage of harmonic trading is that is allows traders to determine risk vs. reward ratios before trades are placed. With the harmonic method, the strongest trading signals occur when the harmonic structures coincide with other patterns (either on the same time frame or with those seen on multiple time frames).
The ABCD Structure
The simplest of these structures is called the ABCD pattern, where high probability trading setups occur as the pattern completes at the D point. Both the bull structure and the bear structure can be seen in the examples below:
Without looking at the specific Fibonacci relationships, we can see that at each reversal point (at A, B, C, and D) prices make a significant high or low, creating three coinciding swings in price and forming a dominant trend, comprised of three distinct “legs”. These legs are classified as leg AB, leg BC, and leg CD. The BC leg is a corrective retracement, while the dominant trend is characterized by the behavior of the movement seen in legs AB and CD.
Looking at the Fibonacci levels within these legs, we can see that leg BC retraces to 0.618 of the move seen in leg AB. The following movement at leg CD should be equal to the 1.272 Fibonacci extension of the move seen in leg BC. Traders should wait until the move reaches completion at point D before entering into a new position, as this is the main reversal area. These are the most commonly watched Fibonacci levels with respect to the ABCD structure but there are variations in these, which will be described below.
Additional Characteristics
In addition to the characteristics described above, the ABCD pattern is seen as ideal when the length of leg AB is equal to the length of leg CD. This is true not only for price, but also for time, as the duration of leg AB should also be equal to that of line CD. This congruity allows the pattern to reach full cohesion.
Pattern Variations
One key point to remember, however, is that technical analysis in the forex market is not an exact science. Because of this, there are variations that can be seen with the ABCD harmonic pattern. Alternative structures allow the BC leg to retrace 0.786 of CD or to extend to 1.618 of BC.
There are three general ways the ABCD pattern can unfold: The AB=CD pattern occurs when legs AB and CD coincide in terms of price and time. The “classic” ABCD pattern is seen when the Fibonacci relationships match the above criteria but the price legs are not equivalent in terms of price and time. Finally, the ABCD Extension pattern is seen when the time of leg CD is 1.272 (or 1.618) times longer than AB, and the price movement of CD is 1.272 (or 1.618) times longer than what is seen in AB.
Conclusion
The basis of the ABCD pattern is the Fibonacci relationships seen in the proportions of legs AB and CD. These movements allow us to identify an approximate area for where the overall structure will complete. Because of this, coinciding patterns (multiple harmonic patterns on one or multiple time frames) will tend to increase the probability that the identified structures are valid and that reversals will follow.
To contact Ayman Khlifat , email Aymanfxsignals@yahoo.com
More updates on Twitter
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