Welcome to this two-part series on Harmonics! In this first instalment, we'll delve into the foundational concept of the Measured Move using the ABCD pattern. Understanding this essential structure lays the groundwork for precise trading decisions based on harmonic principles.
Introducing the ABCD Pattern
Price action in any market and on all timeframes tends to move from periods of imbalance in supply and demand to periods of equilibrium. This ebb and flow of price discovery is reflected in the ABCD price pattern – a foundational pattern in harmonics which is an area of technical analysis that seeks to utilise the current volatility of a market to predict turning points.
The ABCD pattern illustrates the ‘impulse, retracement, impulse’ nature of trending price action, it consists of three legs:
AB: The initial leg of the move
BC: A corrective phase following AB
CD: The leg that mirrors AB in direction approx. magnitude
Harmonic ABCD Pattern:
Past performance is not a reliable indicator of future results
What is a Measured Move?
The core principle behind the ABCD pattern is that the best approximation of the next phase of directional price movement is the magnitude of the last phase of directional price action. In other words, the best predictor of CD is AB.
A Measured Move is generated by identifying when an AB leg has formed and transposing this AB leg onto the corrective phase at BC.
Understanding the Measured Move within the ABCD pattern serves as a cornerstone for traders seeking to employ harmonic analysis techniques to anticipate market movements with precision.
Measured Move Approximations:
Past performance is not a reliable indicator of future results
How to Use the Measured Move:
The Measured Move is a simple concept but can be very powerful when harnessed correctly. In a world in which the vast majority of technical indicators are lagging in nature, the Measured Move is a forward-looking indicator that is calibrated the volatility of each individual market.
Here are the two cleanest ways to utilise Measured Moves in your trading:
1. Dynamic Profit Target:
Utilise the Measured Move as a dynamic profit target mechanism. Once the initial trend (AB leg) is established, projecting the potential length of the subsequent move (CD leg) provides a quantifiable target for profit-taking. This aids traders in securing gains while the trend continues its momentum.
Benefits:
Additional Tips and Tricks:
Measured Move Profit Target Example:
In the following example, EUR/USD puts in a clear directional move lower which breaks support – forming an AB leg. The market then undergoes a choppy period of retracement – forming our BC leg.
A trend continuation trade setup in which EUR/USD is shorted can then be initiated and a profit target can be generated using a Measured Move (CD) which is generated by transposing AB onto BC.
Part 1: EUR/USD Daily Candle Chart
Past performance is not a reliable indicator of future results
Play if forward (see part 2 below) and we can see that the market comfortably hits the harmonic measured move target and forms a short-term bottom around the harmonic target zone.
Part 2: EUR/USD Daily Candle Chart
Past performance is not a reliable indicator of future results
2. Reversal Zone:
The Measured Move can be used to identify areas where price action may stall or reverse direction. When the CD leg completes near the projected Measured Move level, it serves as a signal for potential trend reversal, providing an opportunity to enter trades in the opposite direction.
Benefits:
Additional Tips and Tricks:
Example 1: FTSE Completes Measured Move into Resistance
In the following example, the FTSE completes a harmonic Measured Move into a clear area of horizontal resistance. Notice how a series of reversal candles form near the harmonic completion zone.
FTSE 100 Daily Candle Chart
Past performance is not a reliable indicator of future results
Example 2: Gold Completes Measured Move into Resistance
Here’s a recent example of a harmonic Measured Move completion in the gold market. Notice how this completion occurs at a key level of resistance and a large bearish engulfing candle forms upon completion.
Gold Daily Candle Chart
Past performance is not a reliable indicator of future results
Summary:
By integrating the Measured Move technique into your trading strategy, you gain a structured approach to both profit-taking on trend continuations and identifying potential reversal areas. This methodical application of harmonic principles aids in enhancing trade precision and confidence.
In Part 2 we'll explore advanced harmonic concepts building upon this foundation.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Introducing the ABCD Pattern
Price action in any market and on all timeframes tends to move from periods of imbalance in supply and demand to periods of equilibrium. This ebb and flow of price discovery is reflected in the ABCD price pattern – a foundational pattern in harmonics which is an area of technical analysis that seeks to utilise the current volatility of a market to predict turning points.
The ABCD pattern illustrates the ‘impulse, retracement, impulse’ nature of trending price action, it consists of three legs:
AB: The initial leg of the move
BC: A corrective phase following AB
CD: The leg that mirrors AB in direction approx. magnitude
Harmonic ABCD Pattern:
What is a Measured Move?
The core principle behind the ABCD pattern is that the best approximation of the next phase of directional price movement is the magnitude of the last phase of directional price action. In other words, the best predictor of CD is AB.
A Measured Move is generated by identifying when an AB leg has formed and transposing this AB leg onto the corrective phase at BC.
Understanding the Measured Move within the ABCD pattern serves as a cornerstone for traders seeking to employ harmonic analysis techniques to anticipate market movements with precision.
Measured Move Approximations:
How to Use the Measured Move:
The Measured Move is a simple concept but can be very powerful when harnessed correctly. In a world in which the vast majority of technical indicators are lagging in nature, the Measured Move is a forward-looking indicator that is calibrated the volatility of each individual market.
Here are the two cleanest ways to utilise Measured Moves in your trading:
1. Dynamic Profit Target:
Utilise the Measured Move as a dynamic profit target mechanism. Once the initial trend (AB leg) is established, projecting the potential length of the subsequent move (CD leg) provides a quantifiable target for profit-taking. This aids traders in securing gains while the trend continues its momentum.
Benefits:
- Offers a clear and predefined target for profit-taking, aiding in trade management.
- Can help traders to focus on the trade setups with the most attractive levels of risk-to-reward.
Additional Tips and Tricks:
- Confirm the Measured Move target with other technical indicators or patterns for stronger validation.
- Adjust trade size and risk exposure according to the projected target to optimise risk management.
Measured Move Profit Target Example:
In the following example, EUR/USD puts in a clear directional move lower which breaks support – forming an AB leg. The market then undergoes a choppy period of retracement – forming our BC leg.
A trend continuation trade setup in which EUR/USD is shorted can then be initiated and a profit target can be generated using a Measured Move (CD) which is generated by transposing AB onto BC.
Part 1: EUR/USD Daily Candle Chart
Play if forward (see part 2 below) and we can see that the market comfortably hits the harmonic measured move target and forms a short-term bottom around the harmonic target zone.
Part 2: EUR/USD Daily Candle Chart
2. Reversal Zone:
The Measured Move can be used to identify areas where price action may stall or reverse direction. When the CD leg completes near the projected Measured Move level, it serves as a signal for potential trend reversal, providing an opportunity to enter trades in the opposite direction.
Benefits:
- Pinpoints potential reversal points, allowing for strategic entry into new trends.
- Provides an early indication of trend exhaustion or change in direction.
Additional Tips and Tricks:
- Combine the Measured Move analysis with horizontal levels of support and resistance.
- Combine with reversal candlestick patterns.
Example 1: FTSE Completes Measured Move into Resistance
In the following example, the FTSE completes a harmonic Measured Move into a clear area of horizontal resistance. Notice how a series of reversal candles form near the harmonic completion zone.
FTSE 100 Daily Candle Chart
Example 2: Gold Completes Measured Move into Resistance
Here’s a recent example of a harmonic Measured Move completion in the gold market. Notice how this completion occurs at a key level of resistance and a large bearish engulfing candle forms upon completion.
Gold Daily Candle Chart
Summary:
By integrating the Measured Move technique into your trading strategy, you gain a structured approach to both profit-taking on trend continuations and identifying potential reversal areas. This methodical application of harmonic principles aids in enhancing trade precision and confidence.
In Part 2 we'll explore advanced harmonic concepts building upon this foundation.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.