Conditions The swing legs (AB and BC) in ABC pattern are generally in symmetrical proportions both in price and time with consistent slopes. The tradable CD leg has a harmonic relation with symmetry for AB and BC swings. The ABC bullish structures are formed after a prolong prior down trend or consolidation trends, whereas bearish ABC patterns are formed after a prior uptrend. Pattern Detection A Pattern Completion Zone (PCZ) is computed using AB swing and Fibonacci ratios (50-88.6% of AB). This PCZ area is where 'C' pivot is formed at the end of BC swing and to signal completion of ABC pattern. The Fibonacci relationships help and give ideas an approximate area (PCZ) where the pattern may complete. Precise ratio levels for reversals or targets in patterns are very rare and a tolerance ratio of +/2% is added for the fib. ratios. Pattern confluences with other patterns, support/resistance areas, MAs and other market context elements must be used to identify and validate the pattern structure. Example: ● The following chart shows the auto-generated ABC bullish pattern formation in current 20 Year Treasury Bond ETF TLT (weekly) chart from 2012 to 2016. Here are some of the key points and how it is traded. Trade Entry: After ABC pattern is completed, it is advisable to wait for the pattern to confirm a reversal signal using any momentum based indicator or price confirmation mechanisms. I use various confirmation and trade entry methods, but one of the methods is price crossing 2-bar high after 'C' in ABC Bullish pattern or a 2-bar low after 'C' in ABC bearish pattern. Stop: A Stop is placed few ticks below C (in Bullish) or few ticks above C (in Bearish) levels. Targets: The ABC Pattern targets are computed using the AB and BC swings. The height pattern (AB) is used to project target levels from C-level using fib. ratios. The first target zone is (62-79% AB) from 'C' and second target zone is (127-162% AB). A secondary target level is set at 100% AB Level at 152.21. Key Ideas to Remember: ● TLT was in downtrend from 2012 to late 2013. ● From the beginning of 2014 to beginning of 2015, TLT reversed its prior trend and formed AB Leg (A at 101.17 and B at 138.50). ● During 2015, TLT started to decline to 63.4% of AB leg and formed BC leg. ● After completion of 'BC' leg (7/24/2015), a reversal above 2-Bar high signals a long entry at EL: 119.19. ● A Stop is placed below 'C' at 114.88 (-4.32). ● The first Target Zone is set at 137.95-144.22 and second target zone is set at 162.29-175.35 ● In July 2016, TLT reached its first target zone (137-144). Bearish pattern.
80 Publizr Home