Trade Setup
Once the X and A points have been identified the market forms the B by fulfilling at least a 38.2% retracement and then either precise 38.2% or precise 50% retracement of the XA leg. The term "precise" means that it is closer to the 38.2% than the 50% retracement. Therefore, if the retracement is 1 pip less than 44.1% (halfway between 38.2% & 50%) then it is treated as 38.2%, if it is 1 pip more than 44.1% then it is treated as 50%. Also, if it is 1 pip less than 55.9% (halfway between 50% & 61.8%) then it is still treated as 50% retracement. If it is 1 pip more than 55.9% then it is treated as 61.8% and therefore, invalidates the pattern.
To summarise, the B point is valid so long as it falls between 38.2% and 55.9% X-A leg. The importance of whether or not the B point is a "precise" 38.2% or 50% is to do with the formation of the D point, also known as the Potential Reversal Zone (PRZ). This is explained in more detail below.
The C point is valid if it touches at least a 38.2% retracement of the AB and it does not exceed the A point (100% AB).
If the B point has formed at the "precise" 38.2% of the XA, then the Potential Reversal Zone (PRZ) is calculated as a combination of the 88.6% retracement of the XA level, 1.618AB=CD movement level (so the same distance as the 161.8% of the A-B leg but this should be copied across and measured from the C point) and finally, the corresponding BC extensions:
261.8% of the BC if the C-point is precise 38.2% of the AB,
261.8% of the BC if the C-point is precise 50%% of the AB,
261.8% of the BC if the C-point is precise 61.8% of the AB,
224.0% of the BC if the C-point is precise 70.7% of the AB,
200.0% of the BC if the C-point is precise 78.6% of the AB,
200.0% of the BC if the C-point is precise 88.6% of the AB.
If the B point has formed at the "precise" 50% of the XA then the Potential Reversal Zone (PRZ) is calculated as the 88.6% of the XA level, 1.272AB=CD movement level (again, measuring 127.2% of the A-B leg and use this measurement as a length/number of pips to travel from the C point) and finally, the corresponding BC extensions:
261.8% of the BC if the C-point is precise 38.2% of the AB,
261.8% of the BC if the C-point is precise 50%% of the AB,
200.0% of the BC if the C-point is precise 61.8% of the AB,
200.0% of the BC if the C-point is precise 70.7% of the AB,
161.8% of the BC if the C-point is precise 78.6% of the AB,
161.8% of the BC if the C-point is precise 88.6% of the AB.
None of the levels should extend past X.
Harmonic Bat Target 1: 38.2% retracement of the AD leg.
Harmonic Bat Target 2: 61.8% retracement of the AD leg.
Harmonic Bat Stops: 113% extension of the XA
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