This is continuation of my mini series about "When not to draw XABCD lines" It should be named part 2.
"Picture is worth thousand words" Not any picture, if there is a picture about how XABCD works then its not worth so much. Almost every book will tell you that it works, but almost none will tell you when it doesn't work.
For me I like to just deduce, not just merely believe stuff. This mini article is about why and when you should avoid drawing a XABCD lines. It tries to shed some light on the subject, its about limitations of XABCD strategy. There is no strategy based on pure system, every strategy is about planning which is based on reality, on chart not on fantasy, but on real market movements. Good strategy always ask, not to demand outcome, its planning which is based on probability, not on certainty.
So we always ask "Based on market movements now, is it worth my time and money to draw XABCD lines?". On the chart, the red formation we classify as a Gartley pattern. Is it worth to even draw it? For me is not worth my time, for this reason. Fist we are seeing this blue corrections, I don't like this. I don't like the XA leg to be so much corrective. If you try to imagine purpose of XABCD formation in the context of Elliott, you can find that XABCD formation should extend the trend, so it should be simple this:
1. XA leg should be impulse in nature (5 wave pattern or similar to 5 wave) 2. ABCD legs should be corrective, ABCD should be correction to this impulsive XA leg.
Its that simple, everybody with basic understanding of Elliott principle should get it, and it should be simple, we should not complicate this concept much. Simpler the better, corrective and impulsive, that's it!
So why there is two formations on the chart? Its simple. If you see this Gartley pattern negated and market is going to this black D point, you should not be compelled to draw this black Bat formation, for the first reason and for the second which is this.
After Gartley pattern is broken, you should not touch anything, because statistically there is no point in doing this. After that here are frequently moves against any formations and I encourage you just to study broken Gartley's. Some traders even use them to just play brakes (on the chart it would be if price exceed point X).
So I hope that now we have some pictures and mini proves which are the charts itself, not to just take seriously any XABCD formations, but to be careful and seek better opportunity which is worth our time and money.
The quality of traded formations reflects quality of our trading, which reflects our belief about our self worth.
So when you say "I don't like the XA leg to be so much corrective." You mean you'd rather the leg to look like 1 rather than 2?
HarTm564
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Yes, that's correct, but we are talking still about concept without context, but simply yes. If XA leg is beautiful ABCD pattern then look at the charts what is usually happening. Its not a rule, just do your research cause some traders love to have XA leg being corrective cause they for example playing broken XABCD for example broken Gartleys, using them to just push, in your case (in your picture), thru the previous higher high.
HarTm564
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This red ABCD is almost equal, almost AB=CD
In this context I would rather trade this red ABCD or if I were late I would not trade at all.
HarTm564
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In this picture there is not perfect ABCD but still the XA leg is corrective and we have some pullback from this XABCD formation so it "worked" in some way.
So I'm not saying to not trade corrective XABCD formations, but to be careful and to just look at the trend, quality of formation, what was before and to look for overall context of the trade. I will maybe post some charts about harmonics of XABCD formations, cause its also important. Its like with dating, you will not just want to talk with every woman you see, you will pick colors, shape, you will just feel for the right one. Young, fresh, with good looking, with nice shape, with good voice, smile, etc.
I like when XABCD formation is smiling to me. I do not like to trade every XABCD formation without teeth and without shape.