AB=CD education
AB=CD pattern
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.
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 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:
https://d364wuh8hyfjvy.cloudfront.net/public/images/3f929cd7d55549ae9de64eaf0895c9b9.jpeg
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.
https://d364wuh8hyfjvy.cloudfront.net/public/images/272eff6d00754484875237921f69470e.jpeg
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.
https://d364wuh8hyfjvy.cloudfront.net/public/images/9ac172d28cc845a289992f7bb064309a.jpeg
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.
https://d364wuh8hyfjvy.cloudfront.net/public/images/88f0176d19034da4a04efbe42b6a2f12.jpeg
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:
https://d364wuh8hyfjvy.cloudfront.net/public/images/f7d99fddffbf47f79dd70c00febb0fa1.png
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.
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.
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.
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.
https://d364wuh8hyfjvy.cloudfront.net/public/images/3e971f4de59449218f6677559387357e.png
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:
https://d364wuh8hyfjvy.cloudfront.net/public/images/fe6c69a63e274320ae441e0821a1b8f8.png
Short entry at point D – where AB=CD
Stop loss a few pips above the entry
Take profit option 1 at the 38.2% Fibonacci retracement.
Take profit option 2 at the 50.0% Fibonacci retracement.
Take profit option 3 at the 61.8% Fibonacci retracement.
AB=CD pattern
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.
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 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:
https://d364wuh8hyfjvy.cloudfront.net/public/images/3f929cd7d55549ae9de64eaf0895c9b9.jpeg
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.
https://d364wuh8hyfjvy.cloudfront.net/public/images/272eff6d00754484875237921f69470e.jpeg
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.
https://d364wuh8hyfjvy.cloudfront.net/public/images/9ac172d28cc845a289992f7bb064309a.jpeg
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.
https://d364wuh8hyfjvy.cloudfront.net/public/images/88f0176d19034da4a04efbe42b6a2f12.jpeg
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:
https://d364wuh8hyfjvy.cloudfront.net/public/images/f7d99fddffbf47f79dd70c00febb0fa1.png
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.
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.
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.
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.
https://d364wuh8hyfjvy.cloudfront.net/public/images/3e971f4de59449218f6677559387357e.png
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:
https://d364wuh8hyfjvy.cloudfront.net/public/images/fe6c69a63e274320ae441e0821a1b8f8.png
Short entry at point D – where AB=CD
Stop loss a few pips above the entry
Take profit option 1 at the 38.2% Fibonacci retracement.
Take profit option 2 at the 50.0% Fibonacci retracement.
Take profit option 3 at the 61.8% Fibonacci retracement.