Harmonic Trading for Beginners

Harmonic Trading involves identifying specific price structures that display consecutive Fibonacci ratio alignments, which validate harmonic patterns. By calculating the Fibonacci aspects of these patterns, you can identify potential reversal points with a high degree of probability. This methodology assumes that harmonic patterns, like other patterns and cycles in life, repeat themselves. The goal is to recognize these patterns and make informed decisions.

AB=CD pattern in harmonic trading

The AB=CD pattern is a four-point price structure. It starts with a partial retracement of the initial price segment, followed by an equidistant move from the completion of the pullback. This structure is the foundation for all harmonic patterns and has been discussed in many technical works. 

Specific Fibonacci aspects should occur at certain points in the pattern. The C point defines the completion of the pattern. Although the BC projection is crucial, the most significant harmonic number is the exact completion point of the AB=CD.

When analyzing the AB=CD pattern, it’s common to observe specific reciprocal relationships between Fibonacci ratios within its structure. 

The C point retracement of the AB leg typically holds a reciprocal ratio, indicating the BC projection utilized to define the Potential Reversal Zone (PRZ). For example, a 0.618 retracement at the C point will likely possess a 1.618 BC projection that converges with the AB=CD completion. This reciprocal relationship defines the best PRZ for this structure. 

The following ratios complement the AB=CD structure:

The reciprocal ratios help define the completion of the pattern. However, the most important consideration to remember is that the BC projection should converge closely with the completion of the AB=CD.

The bullish AB=CD pattern

The bullish AB=CD pattern is an excellent measure when looking at a well-defined sell-off. Although the symmetry may vary, this basic structure is a minimum requirement for all harmonic patterns.

It’s important to note that the Fibonacci retracement range for the C point can fall between the “0.382; 0.886” Harmonic Trading ratios. This means that the C point can be any ratio in this range, including 0.382, 0.50, 0.618, 0.707, 0.786, or 0.886. 

When we refer to the reciprocal ratios listed above, we can see that this corresponds to a BC projection of either 1.13, 1.27, 1.41, 1.618, 2.0, 2.24, or 2.618. In rare cases, a 3.14 projection may be used.

The bearish AB=CD pattern

The bearish AB=CD should possess a distinct symmetry with the completion point of the pattern complementing the BC projection and defining a precise PRZ.

Alternate AB=CD pattern

The alternate AB=CD pattern is often seen in patterns such as the Crab and the Butterfly during extended sell-offs. However, it should be noted that the alternate AB=CD pattern is not the only Fibonacci number used in the PRZ. 

Matching AB=CD patterns usually have stronger completion points compared to alternate structures. The 1.618 AB=CD pattern is not commonly used when compared to other AB=CD combinations. Despite the differences, each AB=CD measurement can accurately identify reversal areas and provide an effective way to measure price structures in harmonic patterns.

The perfect AB=CD pattern

The perfect AB=CD pattern is defined primarily by the C point, which must precisely retrace 0.618 of the AB leg. Ideally, the B point should be tested but not exceeded to a significant degree. The 0.618 C point retracement establishes the 1.618 BC projection.

Although a 1.618 extension often indicates an extreme area from a Fibonacci perspective, these patterns frequently yield significant reactions, particularly in perfect AB=CD patterns.

These structures typically display high levels of symmetry and possess the most ideal geometric structures. The 0.618 and 1.618 within the perfect AB=CD pattern represent the most harmonic ratios for obvious reasons.

Another aspect of the perfect AB=CD pattern is the general time consideration, where each leg should be exactly equivalent in duration. Although an exact time length for each price leg is not required, each segment of the pattern should be distinctly symmetrical.

• Precise 0.618 C point retracement of the AB leg.
• 1.618 BC projection.
• Equivalent time duration for each leg.
  
  

Summary

Although the basic AB=CD structure may possess a variety of Fibonacci ratios, the concept of support or resistance at the completion of two distinct and consecutive price legs is the essence of all harmonic patterns. Alternate AB=CD patterns underscore the importance of using the basic structure to define the completion of specific patterns.

In either AB=CD, the BC projection should complement the completion point of the pattern. It is important to remember the reciprocal relationships of the C point to the BC projection. A perfect AB=CD utilizes the 0.618 retracement and 1.618 extension, as the most harmonic alignment of Fibonacci ratios for the pattern. We believe that this pattern should possess specific characteristics to be a valid harmonic structure and to define a trading opportunity:

• Minimum AB=CD completion where each price leg is equivalent.
• C-point retracement can vary between 0.382 to 0.886, although 0.618 is preferred.
• BC projection can vary from 1.13 to 3.618 and depends upon the C-point retracement.
• Alternate AB=CD patterns exist.

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