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1,618 projection usually indicates exhaustive price action. Often, when price action exceeds the 1,618, it usually represents extreme price action that is difficult to sustain. The 1,618 can also be considered as overbought/oversold since the 1,618 represents price action that is too extreme. Therefore reversals that occur beyond this area will usually happen quickly. When the 1,618 projection within a PRZ has been tested, the determination of the trades execution is imminent.
Bullish 1,618
When a bullish 1,618 projection occurs we can often assume that we're facing an extreme sell-off. When price action is declining, the trend can often become over-extended. Then 1,618 projection point can identify profitable set-ups, since price action that reverses from these over-extended areas can frequently provide sizable reactions.
Bearish 1,618
This one is an important level because it is an excellent area to take profits or enter a short position. The same goes for this one, it represents an extreme price area. Often, when an established trend tests a significant 1,618 projection, it will encounter some degree of resistance.
Although price action does exceed the 1,618 area, it is important to understand that such action can be difficult to maintain. Also, if the area is exceeded, the price action should rally strongly through the area to ensure that a reversal will not occur. Therefore, it is critical to examine closely the area and be prepared to sell, regardless of the best prospects perceived.
We started this journey with the ,618 retracement. It's one of the most significant Fibonacci numbers out there. We also included into this HR the 0,786 retracement level. This one appears when price action has gone past the ,618 retracement level and it indicates extreme price action. In case it fails, the price action continues in the direction of its previous move.
In order to find HR out there, we start the whole HR journey by measuring relations in price movements. We simply pick a movement and we apply the 0,618 retracement level in order to project the reversal area. In case the movement has passed beyond the 0,618 are, we look for the next level which is the 0,786 retracement level.
No rocket science here right? Just a simple observation of where the price action has started, ended and a retracement projection.
Next step is to measure the projection from beginning to the end. After that you put out the projection. If the retracement is 0,618 then the projection is of 1,618. If the projection is 0,786 then the projection is 1,27.
IF we put all this together we get the AB = CD pattern. By now we have alltogehter a relationship of three HR's. That gives the pattern a high probability.
Before we studyied levels of retracement and projection. Now let's get to the patterns.
The most basic pattern is a the AB=CD. In this pattern, the A to B leg is the first price move. After a brief retracement from point B to point C, the pattern will complete the C to D leg, which is the same length as AB. Simply, after the AB and BC legs have been established, you project the AB length from point C.
Although the price action will not always be exactly equivalent, the AB=Cd legs usually will be close enough to determine the reversal point. Sometimes this pattern will be exact, however it's up to the trader if he/she wants to wait for the CD leg to be at least equal the AB leg. Although, it is not uncommon for the CD leg to slightly 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 the same length of time. Although this is an ideal situation, the time duration does not need to be exact. If the price legs are close, the pattern is still valid.
This pattern occurs frequently, and if you train your eye to notice these patterns, they will begin to jump out at you. It is important to look for two price legs that are distinct. Once you study several examples, you will be able to decipher AB=CD patterns easily.
Bullish AB=CD
In the bullish picture below the point A is the highest point and point D is the lowest. Each price leg should be distinct with a symmetrical slope down.
It is difficult to observe this pattern 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 price action is weak. Although it may be difficult to perceive, the pattern is actually indicating an excellent buying opportunity.
Bullish AB=CD Stop Loss
The stop loss in this pattern is somewhat subjective. Generally, the stop loss should be a point below the exact completion of the pattern.
If a reversal is going to occur, the price action usually will turn bullish in this area. So, it's important to study this area closely to determine the validity of the trade. Once the price action tests the area where the pattern completes, it "should" begin to rally. If the price action does not turn around, thee are some signs to be aware of that will invalidate the set-up. If the price action closes below the completion point or continues to decline after hitting the area, this would signal that the reversal probably would not occur.
The ideal bullish AB = CD pattern will have two distinct declining price legs. The pattern begins at the point A with a sell-off to point B. After a retracement to either the 0,618 or 0,768 of the AB leg, the CD leg begins. The sell-off of the CD leg should complete either at the 1,27 or the 1,618 projection of the BC leg.
The completion of this pattern should have two harmonic calculations converging in a specific area. The most important number is the point where the CD leg equals the AB leg. Try to consider the completion of an exact AB=CD as a minimum requirement before entering a trade. Sometimes, the price action will reverse just shy of the exact completion point. In this situations, wait for a clear reversal sign in the price action before executing a trade. The BC projection, either 1,27 or 1,618, should converge very close to the completion point at D to complement the PRZ.
Although the AB= CD is usually distinct, the Fibonacci calculations can be very effective in determining the completion of the pattern. As a rule of thumb, examine the retracement of the AB leg to determine the BC leg projection. Specifically, if the BC leg retraces to the ,618 of AB, the completion of the pattern will occur at the 1,618. If the BC leg retraces to the 0,786 of AB, the pattern will complete near the 1,27 BC projection.
This pattern occurs frequently. Often the ideal pattern will bounce almost exactly off the harmonic numbers and provide a set-up that almost seems too good to be true.
Same rules applies to the the Bearish AB = CD, but in the opposite direction.
Jeff, I was playing around with my charts and put the Candle Clear indicator on one of them. Do you happen by any chance to have that on?! Because in that case the same thing happens to my charts. The scalper doesn't plot. And that's because of the "Thick wick = True".
Se the picture:
Although the AB=CD pattern is a great set-up when each leg equals the other exactly, there are many situations where alternative Fibonacci calculations are required to clearly define the PRZ. Although there might be a clear pattern developing, it is not uncommon for the AB=CD to be unequal. These alternate projections should merely complement an area that possesses other harmonic numbers.
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 alternate 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.
Alternate Bullish 1,27 or 1,618 AB=CD (same rules applies to the alternate bearish ab=cd but in the opposite direction)
The bullish alternate projection is useful to gauge other potential reversal areas for price moves that exhibit a clear AB=CD pattern. The CD leg usually will experience an extended decline that reverses off the 1,27 or the 1,618 of the AB leg.
No never had that indicator, only the RSI, Volume, and pivots on stocks. I'll try a chart with nothing but the Scalper Indicator and see if that makes a difference.
