Harmonic series – Forex Academy

Introduction

H.M Gartley published a book known as ‘Profits in the Stock Market’ in 1932. In this book, Gartley shared the entire group of harmonic patterns that are widely being used by traders across the world. AB=CD is one such pattern from the harmonic group. As time has passed, professional traders and market technicians improved this pattern a lot. They have also incorporated the Fibonacci ratios to this pattern, which will be discussed in this article.

AB=CD is a reversal pattern that helps traders in predicting when the price action of an underlying asset is about to reverse. It is a visual geometric pattern comprised of three consecutive price swings. This pattern helps to identify the trading opportunities in all types of markets, on any timeframe, and in any kind of market condition. Bullish AB=CD pattern helps traders in identifying higher probability buy trades, whereas bearish AB=CD patterns help in determining selling opportunities.

This pattern includes a total of four letters – A, B, C, D. Each turning point represents a significant high or low on the chart. These turning points are referred to as AB move, BC move, and the CD move. Let’s see how traders must perceive this pattern in the upcoming sections.

AB=CD Pattern Rules

Bullish AB=CD Pattern

The bullish AB=CD pattern always appears in a downtrend.
First of all, point A to B will be any random downtrend move.
Then the price action must go into the counter side of the AB move, printing the B to C move.
The original selling trend should resume and print the CD leg resembling the AB leg.
Once all these three moves are completed, we can conclude that the market has printed the bullish AB=CD pattern
Activate the buy trades only at point D.

Bearish AB=CD Pattern

Bearish AB=CD pattern is nothing but a mirror image of the Bullish AB=CD pattern.
The pattern begins with a bullish line from point A to B.
These points could be any random move in an uptrend.
B to C move should reverse the trend of the market but shouldn’t cross point A.
C to D move should be equal in size to point A and B.
Once all these moves are completed, we can conclude that the market has printed the bearish AB=CD pattern
Start taking sell trades only from point D.

AB=CD Pattern – Fibonacci Ratios

As already mentioned, Fibonacci ratios can be used to confirm the validity of the AB=CD patter. Below are the fib levels that are incorporated in the AB=CD pattern by trading experts for pattern validation.

BC leg is the 61.8% Fib retracement of AB leg.

CD leg is the 127.2% Fib retracement of BC leg.

Only at these retracement levels, the length of AB will be equal to the length of the CD.

Only take the trades if these above Fibonacci levels are matching with the setup on your charts. Ignore the setup if the Fib levels aren’t matching.

As you can see in the above image, the BC move retraces 61.8 of the AB and CD move is the 127.2% extension of the BC move. Also, the length of the AB move is equal to the extent of CD, i.e., both the movements must take the same time to develop on the charts. If any underlying currency pair is confirming all the mentioned rules, only then we can safely anticipate a higher probability trade.

AB= CD Pattern Trading Strategy

We believe by now, you understood the formation of the AB=CD pattern very well. Now let’s combine this pattern with the Fibs ratio as discussed to learn how to trade this pattern in the right way. As soon as we identify this pattern on the price chart, the only problem most of the traders have is while determining the accurate Fib ratios. Novice or intermediate traders go wrong most of the time in this aspect. As a result, they lose their trade. So make sure always to set the accurate fibs ratio and only then trade the AB=CD setup.

Bullish AB=CD Pattern

In the below EUR/USD 240 minutes chart, we can see that the pair was in an overall downtrend. We can also see that the CD move is equal in size to AB move. Also, after applying Fib ratios, we now know that the BC is 61.8% retracement of the AB move, and CD is the 127% extension of the BC. Therefore we can confirm the validity of the Bullish AB=CD pattern.

Entry, Stop-loss & Take Profit

Execute a buying trade at point D. Furthermore, always place the stops just below the D point. This is because, if price action goes beyond this point, it invalidates the pattern. This pattern provides two ‘take profit’ targets. The first one is point C, and the other is point A. We have closed our full position at point A because after activating our trade, the price action immediately blasted to the north. This indicates that we can expect more extended targets in this pair.

Bearish AB=CD Pattern

In the below 60 minute chart of the NZD/CAD Forex pair, the market was in an uptrend. This means that if at all, we are expecting an AB=CD pattern, it will be bearish. Notice that the AB is completely equal in size to the CD move. Following the rules of the pattern is critical while trading the AB=CD pattern. After applying Fibs, we can see that the BC is 61.8% retracement of the AB move, and the CD move was also a 127% extension of the BC move on the price chart. This confirms the authenticity of the bearish AB=CD pattern. We have executed a sell trade at point D. Although it was not a smooth ride, we have closed our full position at the major support area.

Bottom Line

AB=CD is one of the most popular trading patterns in the market. It is straightforward to identify, confirm, and trade as well. Also, we get to see this pattern frequently in the market, and traders can pair it with other forms of technical analysis to improve the odds of their trades. Always remember to follow the rules of the game; else, it is very difficult to win the game of trading. We hope you find this strategy useful. Try applying this strategy on a demo account and then apply it on the live charts. If you have enough questions, let us know in the comments below. Cheers!

The analysis with rhythmic wave diagrams shows a relationship between the ratios so it will allow traders to further understand the relationship between them and help to make better decisions in trading. To understand the great contribution of the analysis of the harmonic proportions, it should be mentioned that the confluence zones are connected between them by harmonic relations. Also, if you want to know when the market is going to develop a strong movement in a bias you can also apply the harmonic proportions as a relevant indicator.

When the harmonic proportions are plotted, there are points where the harmonic intervals overlap and the market respects these points known as the diatonic Pythagorean scale; As the market respects the areas where different harmonic proportions coincide, this indicates that there are areas of confluence that weigh more than others so that the harmonic proportions will be a complement to the tools already studied, thus giving the trader the information on which major resistances and supports will be more important to the market.

A very important suggestion that must be considered by the trader is never to operate a single index, since in the market there are always assets that are correlated either proportional or inverse, so for certain assets there will be some other index that takes the lead and will serve to predict how the market behaves in the active trading. To see that assets can be correlated with an asset of interest you should analyze assets in the same sector, bonds, global indexes or raw materials.

fibonacci harmonic series

In the graph above the harmonic series is exhibited; There are analyses that apply these series to the market and in the points, that overlap series with others, will be areas that will be more important to the market, as not all areas of supports and resistances weigh the same for the market.

Retaking the Fibonacci analysis, there are certain tips that need to be considered. The highest or lowest prices are not always used to perform the analysis. The market gives the parameter to locate the range such as, the development of a rally in the market, very strong decision bars, gaps or certain technical patterns that indicate a change in the bias. If there are several signs of the market, it is better to draw several ranges to make sure that you are not leaving important areas without analysis, but considering that the ranges and their respective divisions must be areas respected by the market in the past because if this does not happen the drawn range will be irrelevant.

Other tools that serve to support the Fibonacci analysis are the oscillators like the RSI, but it is advisable to use them only when the market is in the confluence areas because otherwise it could give erroneous signals and is not reliable. If the market is reaching areas of confluence that are larger supports or resistances, oscillators will be able to give clues as to how the market behavior will be when it touches these points

Future price projections will be obtained by the projection of boxes where the important is the height of the boxes whose edges will be the ranges that were used for the Fibonacci analysis. If the market does not respect the first box of a small range, you should draw larger boxes that cover larger ranges and oscillations and their respective subdivisions that generate areas of confluence. This is the first step in creating future projections.

Using this Fibonacci analysis with the boxes starting from points of confluence to prices where a strong movement has been triggered and its subsequent subdivision with the Fibonacci ratios can be projected future prices in the oscillations that are formed. Many people do not know how to project in this way so they resort to Fibonacci expansions, a topic discussed in the article “Foundations of Fibonacci Extensions” (Foundations of Fibonacci Extensions) which is just as valuable and perhaps a little easier.

Another form of analysis is the Fibonacci channels. The channels are a variation to the Fibonacci retracements in which separate trendlines are drawn from a base price channel at distances provided by Fibonacci ratios. As a result, you get parallel trendlines that form channels used to estimate resistance and support zones as well as a Fibonacci retracement, only projected on a different axis. To create a parallel channel, it is observed first pivots that are confirmations of confluence zones that were analyzed in the horizontal axis, the lines of support or resistance in the channels must be respected where there are areas of confluence using the Fibonacci retracements. The pivot points will serve to create the channels are made in such a way that they respect important areas encountered previously.

The first step is to draw a channel where there are important pivots and based on this main channel are projected the Fibonacci percentages. This type of analysis also creates support areas and resistance and the knowledge becomes more robust because traders not only have the areas of horizontal confluence also have important areas diagonally. On many occasions, the intersections between different axes mark the entry point, but you should keep in mind that the stop loss points must be beyond the confluence zones and outside the Fibonacci channel.

In the previous graph you can see some Fibonacci channels having as the basis of the channel the trend line of the market and then based on this project the Fibonacci ratios It’s important to have in mind that to be projected based on this trend line, the pivot points must have respected this trend line and the confluence areas that have been encountered with the Fibonacci retracements.

In this second graph, you can see the horizontal Fibonacci levels and the Fibonacci channels. As mentioned in this article, areas where support is intercepted or resistances with the channels will be areas that respect the market with greater determination and will be interesting areas to analyze. If you add this to the analysis with harmonic series, it will be a well-done analysis with enough tools to make no mistakes.

Summarizing, regardless of the asset, you should follow the same steps to analyze your important areas. First, it should be determined whether the areas you want to find are support or resistance zones, and depending on this you will proceed to stipulate the range to use Fibonacci retracements and other tools. There may be many ranges. They will always have the same starting point, but it will be carried at different price levels to obtain different ranges and several confluence zones. After identifying these areas, you should verify that the market has respected them in the past in different time horizons and be clear that the areas that have been found as major supports do not serve as resistance, that is another stage in the analysis. When you have identified the most relevant areas of the market it is advisable to shade them and eliminate those areas irrelevant to make the graph easier to interpret. Using the channels, retracements and Fibonacci expansion, oscillators, and Elliot’s principle, you will have the necessary tools to project the future direction of the market and thus make the best decisions of entry and exit.