Within the patterns, there are 3 types as mentioned below.
Price and Time: Under this type of the amount of distance and the time it takes for price to travel from A to B is equal to the time and distance from C to D
Classic ABCD: In this pattern, the BC is a retracement of 61.8% – 78.6% of AB, with CD being the extension leg of 127.2% to 161.8% (equal in price distance)
extension: CD leg is an extension of AB between 127.2% – 161.8%
Swing points A and B form the highest high and the lowest low of the swing leg
When AB is identified, the next step is to plot BC
C must be lower than A and must be the intermediate high after the low point at B
C usually retraces to 61.8% or 78.6% of AB
In strong markets, C can trace only up to 38.2% or up to 50% of AB
Point D must be a new low below point B
CD must be 127.2% or 161.8% of AB or of CD
Buy at point D
Some variations to the rule include:
CD can be an extension of AB anywhere from 1.272% up to 2.00% and even greater
CD leg usually slopes at an angle that is wider than the AB leg
When there is a gap formed after point C, it indicates that the CD leg will be much larger than the AB leg
Appearance of wide range bars near point C is also an indication that CD will be an extended leg
In most cases, AB and CD are equal in time and price
If the CD leg is covered within just a few price bars as compared to the AB leg, then it is an indication that the CD leg will be an extension of AB
The opposite rules apply for patterns. The chart below illustrates a Buy trade example where we notice that BC retraced close to 61.8% (at 59.4%) after which CD travelled close to 139.6% of the AB leg. After the D point has been identified, a buy order would be place at or above the high of the candle at point D.
Traders should note that the count should not be confused with the corrective waves from the count.