Trading Harmonic Pattern AB=CD

AB=CD is the only four point pattern in Harmonic Trading basket. This is the simplest and important pattern which is also used with five point patterns. AB=CD means the move/leg from point A to point B and from point C to point D are equal. The moves are calculated using Fibonacci ratios, but from where to start is in your mind, right?

The table on right hand side has two columns - the left defining 'C point retracement' which is nothing but a pull back after a certain price rise or fall. For an example, the price of ABC stock rise from $100 to $110 which is $10 gain and fall back to $105 which is nothing but the retracement of 50% (gain of $10 and fell back by $5 - losing 50% of its gain). Similarly you can calculate various ratios mentioned in the table. For many traders who are using technical software, there are Fibonacci tool who help to calculate it quickly. This is on how to calculate retracements and now you are curious about the word 'Fibonacci Projection' - it is just the Fibonacci calculation to project the move above the 100% move. I know you are expecting an example to clear your doubt. Lets go for it - in the above example we saw price moving from $100 to $110 and fell to $105. If we want to calculate 161.80% Fibonacci projection from $105, $5 (from $110-$105) is multiplied with 1.618 (5*1.618=8.09) and added to $105 which give level of $113.09.

Coming back to AB=CD pattern - it can be Bullish or Bearish. The fall or rise in first leg is termed as AB=CD (in previous example, the move from $100 to $110 will be termed as AB). The retracement is termed at point C - the retracement of 50% at $105 is point C in above example. Hope the structure of A-B-C is well understood. Now come back to above table of right columns which heads BC projection - this means you should calculate Fibonacci projection from point B to point C. But you are skeptical which ratio to  calculate as there are 7 ratios mentioned in the column. Check retracement at point C in left column and look for reversal level at point 'D' which is BC projection. In example, we have seen price retracing by 50% at $105, the projection will be used at 200% - which means my reversal level for shorting will be $115 ($5 - from $110-$105 will be multiplied by 200% gives the level of $115). I will enter the short trade at $115 as per Bearish AB-CD pattern. Similarly, the bullish pattern will be calculated inversely. 

I have received the questions of trading CD leg from many traders, my answer to all is "NEVER". I will always to prefer an entry at point 'D'. 

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