Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 1 of 12
AB=CD
The AB=CD pattern is one of the most basic and simple patterns in technical
analysis. If the trader will take the time to learn this pattern and its variations,
it will be time well spent.



Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 2 of 12



If C = 38.2 AB Then CD = 2.24 AB
If C = 50 AB Then CD = 2.00 AB
If C = 61.8 AB Then CD = 1.618 AB
If C = 70.0 AB Then CD = 1.41 AB
If C = 78 AB Then CD = 1.27 AB
If C = 88 AB Then CD = 1.13 AB
Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 3 of 12

AB=CD PATTERN STRUCTURE

The AB=CD pattern is found in all markets and all time frames. The pattern
is a measured move where the CD leg is similar in length to the AB leg. It
should be noted, though, that the CD leg can extend and will not always be
exactly equal to the AB leg; this is discussed in Important Characteristics
of the AB=CD Pattern later in this chapter.

There are three legs that form this pattern. The first leg of the pattern is
labeled AB. After the completion of the first leg, a retracement or correction
occurs that will usually find support or resistance at one of these Fibonacci
levels: .382, .50, .618, or .786. This correction or retracement is labeled BC
and is the second leg of the pattern. (Note: Strongly trending markets will
usually see only a retracement to the .382 level. See the chart in the Slope
and Time Frames section later for an example of a shallow retracement at
the .382 level.)



When price resumes in the same direction as the AB leg, the CD leg
then begins to form. Once we identify the CD leg forming, we can project
the potential pattern completion and devise a trading strategy. As the CD
leg forms and completes, we monitor the final leg for any warning signs
that would alert us to a change in market conditions that may signal us to
Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 4 of 12
possibly pass on the trade or wait for further confirmation before entering
the trade. Once the price exceeds B, we make an assumption that the price
will reach pattern completion at point D.
When studying this pattern, it is important to know what invalidates
the pattern.

Here are three items that would invalidate the AB=CD pattern:
1. BC cannot exceed the AB leg, meaning the retracement of AB cannot
exceed 1.00.
2. BC can be a 1.00 retracement of the AB leg; this is a rare pattern and a
double top or bottom, but it is a valid pattern.
3. D must exceed B in order for the pattern to complete at point D and be
a valid AB=CD pattern.



Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 5 of 12
IMPORTANT CHARACTERISTICS OF THE
AB=CD PATTERN
About 40 percent of the time, the AB=CD pattern will be perfectly
symmetrical, meaning AB equals CD. The other 60 percent of the time
variations of the pattern will be present. What this means is that after the AB
leg has formed and the retracement leg, BC, has completed, the CD leg will
be different from the AB leg. The two legs may or may not be perfectly
symmetrical.

Some of the ways the CD leg can vary from the AB leg include:
a. The CD leg is an extension of AB anywhere from 1.27 to 2.00 or greater.
b. The CD leg has a slope or angle steeper or wider than AB.

At first glance this variation might make the trader think the pattern
is not tradable. The key lies in identifying the BC leg. The most important
thing is to watch the price action coming after point C has formed. Many
of the examples that you will see in this chapter will show that the CD leg
determines the relationship to the AB leg.


Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 6 of 12

CD LEG VARIATIONS

These CD leg phenomena can be described in four ways:
1. If after point C has occurred a gap exists in the direction of point D,
this usually indicates that the CD leg will be much greater than the AB
leg1.272, 1.618, or more.

2. A wide range bar (twice normal size) at point C is another indication
that the CD leg could become extended. See Figure 4.8 as an example.
3. Ideally, AB=CD moves are symmetrical in price and time. For example,
if the AB leg is six bars up, then the CD leg will be six bars up.

4. As illustrated in Figure 4.10, the time to form the two legs is symmetrical.
This next sentence is very important: If the CD leg is made in just a few
bars, this strongly indicates that the CD leg is going to be an expansion of
the AB leg.

Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 7 of 12
Classic AB=CD pattern on EOG Resources (EOG) daily chart with gap
from point C and sharp sloping down move to point D suggests CD leg will
extend.

All the warning signs are present in this 120-minute chart of the NASDAQ
futures. Notice the long bars as the CD leg is just beginning down. This gives the
trader an alert that the CD leg may be an extensi on to 1.272, 1.618, or greater of
the AB leg.


Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 8 of 12
Euro currency daily chart showing AB=CD pattern with very symmetrical
six bars up in the AB leg and six bars up in the CD leg.

5-minute chart showing time is also an element in the symmetry of the patterns.

A very long bar from the C turning point in this Intel (INTC) daily chart indicates
that the CD leg will be an expansion of the AB leg.
Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 9 of 12
SLOPE AND TIME FRAMES

The slope or time frame of the BC move can also be helpful in determining
the pattern. BC legs generally correct to one of the Fibonacci ratios:
.382, .50, .618, or .786. The slope of this BC leg is usually a good indication
of what the next CD leg will be. For example, assume that the AB leg
took 15 trading bars to reach point B, and now the BC leg has taken 8 bars
but has retraced only .382 percent of the AB leg. This is a sign of the market
absorbing a lot of selling at a high price; it is a shallow retracement,
and the price has not been able to retrace to .50, .618, or .786 percent. We
would assume that prices would go much higher and possibly quite rapidly
once the selling slows. However, if the market retraces to a .618 or .786
retracement, the CD leg will most probably be a normal move equaling
AB=CD.
To figure the extension of the CD leg, take the difference between A
and B and multiply it by 1.272 or 1.618; then add the resulting figure to the
low (or subtract it from the high) of C. The steps in Figure 4.12 to find the
1.618 projection would be calculated like this:

B = 1274 A = 1256 = 18 points 18 points 1.618 = 29.12
Add this to the low of C: 1266.25 + 29.12 = 1295.37
(If figuring 1.272 or any other extension number, simply use that number
in place of 1.618.)

The number of time bars in the AB=CD pattern will usually range from
five to eight bars. When the CD leg is extending beyond eight bars in an up
or down move, the probability is for a price extension where CD will be
1.272, 1.618, or greater of the AB swing.


Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 10 of 12

In this S&P E-mini 30-minute chart, the 1.618 extension can be figured
by taking the difference between the high and low of AB, multiplying it by 1.618,
and adding it to the low (or subtracting it from the high) of C.

TRADING THE AB=CD PATTERN
Trade Setup #1: AB=CD Sell Pattern
Market: S&P 500 E-mini

In the trade shown below , the S&P E-mini market completes
a picture-perfect AB=CD sell pattern. A limit order would be used on this
entry at approximately 1286 to go short, just below the completion point at
D. Once the order is filled, a stop-loss buy order is placed 5 points above
the entry. In this case the stop-loss buy order would be placed at 1291.
The first exit is at the .618 retracement of the AD swing. We shade
the exit order, meaning we place orders just above or below the actual
exit, just as we do the entry orders, about .50 to 1 point away to try to
Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 11 of 12
ensure a fill. The exit order would be placed at 1279.50, just above the .618
retracement. Occasionally the market may trade just at but not through the
price, and it will be up to the individual traders discretion how to handle
these situations. We prefer to exit if the price is traded at, even if it means
slightly less profit. We dont want a winning trade to turn into a losing trade.
Risk-Free Trade Once a profit is realized on the first part, the stop-loss
order is then moved to the breakeven point. This accomplishes two very
important things:
1. Reduces the risk in the trade.
2. Books a profit.
At this point in the trade we have a 6.5-point profit and our stop has
been moved to the breakeven point. Our second profit objective is at the
.786 retracement level from the AD swing. We place a limit order to exit
the second contract at 1277.25, just above the .786 retracement level. Once



Harmonic Pattern AB=CD

(The reader should keep in mind that these patterns are only probabilities; they are not certainties, and trying to use
these patterns without a solid understanding of them and a sound money management strategy is equivalent to
trading suicide.)
Prepared By: Aq - Dated: June 8, 2014 Page 12 of 12
This is a picture-perfect S&P E-mini day trade of the AB=CD sell pattern.
The market turns down almost exactly at the completion of D (15-minute chart).
the second profit objective is filled, we then remove our stop-loss order.
The second contract profit nets 8.75 points for a total profit of 15.25 points.

Examples:

S&P E-mini 15-minute chart showing an AB=CD buy pattern trade where shading
the order just above the actual completion point definitely helped us to get into
the trade.