Before reading this lesson, you should have read through:

The AB=CD pattern helps you identify when price is about to change direction so that you can buy when prices are low and sell when they are high.

AB=CD is a reversal pattern that helps you identify when the price is about to change direction. The idea is that you can buy when prices are low and about to rise, or sell when they are high but about to fall.

AB=CD consists of three phases or 'legs'

The pattern consists of three legs, with two equal legs labelled AB and CD, together they form a zig-zag shape. For this reason it is sometimes called the 'lightning bolt pattern'. It can be used in any financial market and on any time frame.

This is what it looks like on a price chart:

AB-CD pattern example1

A-B leg

As shown below, when a market is trending upwards, the first leg (A-B) is formed as the price rises from A to B.

AC-CD pattern AB leg

number_1 A-B leg

B-C leg

At point B the price switches direction and retraces down sharply to form the B-C leg.

The retracement (from B to C) can be between 38.2% to 78.6% of the A-B leg, however, an ideal pattern has a retracement of 61.8% to 78.6%. We will use Fibonacci at this point later on.

AC-CD pattern BC leg

number_1 A-B leg
number_2 B-C leg

C-D leg

At point C, the price switches direction again and continues its original uptrend. This leg (C-D) slopes upwards, parallel with the A-B leg and should ideally be the same length as the A-B leg when it completes. The ideal AB=CD pattern is equal in time and price, with point D being an Fibonacci extension between 127%-161.8% of the B-C leg.

AC-CD pattern CD leg

number_1 A-B leg
number_2 B-C leg
number_3 C-D leg

Point D is the end of the pattern

You can sell at point D (or just before) where the pattern ends, or, in a downtrending market, go long at point D.

AB=CD patterns are not always perfect, however, they are common. The chart below shows what a perfect AB=CD pattern looks like when the Fibonacci tool is applied, showing the retracements and extensions:

ABCD with fibs

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Trading the AB=CD pattern

After you have identified the pattern, you can then start to look for a trading opportunity at point D.

For our example, we will use an up-trending pattern that you would use to place a bearish (sell) trade.

To make a sell trade in an up-trending AB=CD pattern, Place a sell order at point D. Place your stop loss a few pips above that point. Once D is reached, draw a new Fibonacci retracement from point A to D of the pattern, place your take profit at the 38.2%-61.8% Fibonacci levels.

You would approach a down trending market with a bullish (buy) trade in exactly the same way, by simply inverting the pattern and your trading orders.

Place your entry order

The first step is to identify point D where the pattern will complete and place your entry there.

Set your stop loss

Place your stop loss just a few pips above point D. This is because if the C-D leg ends up extending beyond this point, it will usually then continue much further in this direction.

ABCD entry and stop

es1 Short entry at point D – where AB=CD
sl2 Stop loss a few pips above the entry

Set your profit target

One way of deciding where to take profits is by drawing a new Fibonacci retracement from point A to D of the pattern. Note that you can only do this once the D point has already been reached and the original pattern has completed.

You can place your take profit order at the 38.2%, 50.0% and 61.8% levels. If you are unsure of which one to place your take profit at, then you can simply place the profit target at the 61.8% level, but watch closely how the price reacts around the levels. If the price struggles to break through any one of them, then you can close your trade down and take profit early.

The chart below shows where you would place your sell order, your stop loss and your profit target:

ABCD profit target

es1 Short entry at the 1.618% extension where AB=CD.
sl2 Stop loss a few pips above the entry.
tp3 Take profit option 1 at the 38.2% Fibonacci retracement.
tp4 Take profit option 2 at the 50.0% Fibonacci retracement.
tp5 Take profit option 3 at the 61.8% Fibonacci retracement.

Summary

From this lesson you have learned that …

  • … the AB=CD pattern helps you identify when a price is about to change direction so that you can buy when prices are low and sell when they are high.
  • … the pattern consists of three legs, with two equal legs labelled AB and CD, together they form a zig-zag shape – hence its nickname, the 'lightning bolt'.
  • … it can be used in any financial market and on any time frame.
  • … when a market is trending upwards, the first leg (A-B) is formed as the price rises from A to B.
  • … at point B, the price switches direction and retraces down sharply to form the B-C leg – ideally a 61.8% or 78.6% retracement of the price increase between points A and B.
  • … the price then continues its original uptrend, forming a C-D leg that should be the same length as the A-B leg.
  • … once you have decided where you think the pattern will complete (point D), you should place a sell order at this point and look to profit from a price reversal.
  • … place your stop loss a few pips above point D.
  • … Drawing a new Fibonacci retracement from point A to D of the completed pattern and a take profit at the point where the price will have retraced 61.8% of the distance between A and D.
  • … you would approach a downtrending market with a bullish (buy) trade at point D in exactly the same way – the pattern and your trading orders will simply be reversed.

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  • it seems to me that there is a contradiction : here you say that the D point is at 138,2 and in your article about fibo retracement you say that there is a corelation : when the price retrace back to 61.8 "it has been observed that it often go back to 161.8".

    I don't think those two affirmations can be correct at the same time : if the ABCD pattern is an indicator of a "reversal" then the 161.8 extension level shouldn't be of much importance.
  • Hey Tiltatout,

    When you look both of the articles and try to combine them, then yes of course you will a certain level of contradiction - this will not be isolated to just the Fibonacci and the AB-CD pattern, but you will find a whole host of technical analysis techniques that 'seem' to contradict themselves.

    However, you need to take each concept individually in order for them to work. For example, when considering a general Fibonacci, then more often than not you will see those retractments and extensions work (so long as there is a confirmed trend - this part is very important.)

    When you see this particular pattern, with all the details of the legs (which is not in the general Fibonacci article) then you take the Fibonacci levels in this article into account.

    When you start to incorporate these concepts into you trading, try and compartmentalize and focus on one concept at a time. Then learn that concept and then through gaining experience, you will start to understand when the appropriate time/market environment is present to apply each concept.

    Does that help?
  • I have noticed that the article of Fibonacci Retacement and this one show charts on a time frame of 30 min and up. Is this pattern and the fibonacci more effective is high time frames? Also, how strong have to be the retracement on leg B-C? If the price retrace smoothly to 61.8% does the pattern still apply? Thank you.
  • It can be traded on any time frame. Regarding the BC leg traders are free to make their own rules but generally the only restriction is C not to go beyond A. If they are same level it is a double bottom/top.
  • Ok thank you hero. After comparing the times frames it looks like the pattern is easier to spot on higer time frames so I guess that would be the reason. I wonder if is also to avoid false signals that appear more often on lower time frames?
  • Obviously low time frames might have more noise and you have to be careful with news and opening and closing of markets. But i know traders who trade harmonics on very low tfs. But it is better to complement it with for example general support and resistance or indies... just like with other strategies where you aim to enhance your edge...
  • the leg BC is what percentage of leg AB ? 38.2 or 50 or 61.8 ?
  • Hi iPM,
    It says above: "The retracement (from B to C) can be between 38.2% to 78.6% of the A-B leg, however, an ideal pattern has a retracement of 61.8% to 78.6%. We will use Fibonacci at this point later on."
    That's how 79 pullback comes into picture. 79 Pullback is an aggressive C play.
    Regards.
    Peter
  • yupp. it does. thanks. smile. after your response I am finally able to spot this pattern to some extend.
  • Is there a bearish version for AB CD pattern?
  • Hi Luff,
    Sure there is. It looks exactly the same, the only difference is that A is the highest point and D is the lowest. See 1st image of the Gartley lesson (ignore X).
    Let me know if you have any more questions.
    Regards.
    Peter
  • Thanks a lot. You are really helpful.
  • What if CD leg drifts sideways before it reaches the entry point? Is the trade invalidated? As long as it doesn't come below the C point I would say the trade is still valid. Is this right?
  • Hi Swan,
    Yes, I have seen trades take ridiculously flat CD legs. Actually, the lesser momentum, the more likely a reversal. On the other hand, it is also possible that price just keeps continue to range after reaching D. So it is up to you to manage the position aggressively or very conservatively after your entry is triggered at D.
    Regards
    Peter
  • Once the fibonacci extension of the AB leg is touched by the CD leg I enter the trade. Should I wait for the candle that touches the extension to close and enter at the opening of the next candle?

    From where to where should I draw the fibonacci retracement that determines the take profit? I usualy draw it from A to the point of entry (the said fibonacci extension of the AB leg). Should I draw it from A to the high of the candle that crosses the fibonacci extension?
  • Hi Swan,
    I think most harmonic traders draw the fib from extreme to extreme. That is, to the actual point D, where the move ended. Remember, the D as determined by the extension of AB is a fib number, so if it was the D=entry you used for drawing the fibs, you wouldn't have to draw fibs extra, all fib levels would be the same (fibing a fib gives you the same fibs):
    http://prntscr.com/c8v1sk
  • Ok, thank you. But how do I know what the acual point D is?
    Is D the high of the candle that touches the fib extention? When the market is on the move, I dont know if the move will end at the end of the line CD of equal mesure to the line AB and parallel to it. It can continue, or not. So, Where exatly is the point of entry? And have I to wait for a candle to close and enter at the oppening of the next candle?
  • The D is the extreme, the high/low point of the move. Of course, you don't know the high unless there is a retracement, but you don't have to think profit or moving stops until there is a retarcement wink

    Whether you wait for the candle to close or enter aggressively, or wait for other confirmation, is really up to your style. There is no right or wrong answer. The secret lies in how you manage the position, how far you put your stop and when you move it. You need to practice it to get a feel for the right process.

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