Technical Analysis: ABC or ABC?
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September 25, 2009
No doubt many have heard of the connections between Elliott Wave and Gann Theory. What is interesting is the similarity between David Bowden's Gann-based ABC System and the Elliott Wave System in ProfitSource. It is something I often see questions about.
Now before you ask yourself, "Doesn't Elliott Wave use ABCs too?" The answer is, "Yes, but no!" Yes, Elliott Wave does use ABC counts, but no they are not the same ones used in Safety in the Market's ABC system.
However, the two do have some rather large similarities. To understand them, let's first think about what we are doing with a Wave 4 Buy; essentially we are trading in anticipation that a retracement has been completed (Wave 4) and the overall trend will now continue upward. The reverse is true for Wave 4 Sells.
Looking at the basic premise of an ABC trade, we realize that it too is designed to trade the end of a retracement against a larger move.
With this in mind, let's take a look at an example of what I'm talking about on David Jones (DJS). The first chart is a weekly one, with a recent ABC trade from mid-August highlighted.
Chart 1 - DJS Weekly ABC
click here to enlarge
Where is the Wave 4 Buy, you ask. Well switching to a daily chart and applying the Elliott Wave, in Chart 2 we can see a Wave 4 Buy appearing on the same date. I have manually labeled the locations of the weekly ABC points in blue. Notice that B is located at the same turning point as Wave 3 and C at the same turning point as Wave 4. While the major move (2-3, A-B) the retracements (3-4, B-C) are being measured against is different, the trades are actually very similar.
Chart 2 - DJS Daily Wave 4 Buy
click here to enlarge
The main difference is the number of bars in each set up. A Wave 4 Buy will comprise more bars on average compared to an ABC. This is because the comparable ABC will occur on a higher timeframe. Often a strong Wave 4 Buy on a daily chart will also be an ABC long on a weekly chart. I have talked about the similarities between Gann and Elliott before and this is yet another example of the two working very much in unison.
As many traders of either method will agree, the biggest killer of both ABCs and Wave 4 trades is entering before the retracement is over. Combing these two techniques and strengths of these two trading methods can help overcome this challenge and find better trades.
For those yet to encounter either trading method, the Elliott set-ups are available in ProfitSource (www.profitsource.com) and ABCs in Safety in the Market's courses (www.safetyinthemarket.com.au).
Happy Trading
Jordan Craw
Trading Tutors Team
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