Basic Pattern Analysis

Pattern Recognition
AB=CD
D
B

A
Basic Pattern Analysis

The AB=CD pattern is one of the most

basic of chart patterns found in
technical analysis. We use this pattern
in virtually all advanced pattern
recognition.

As we move forward you’ll learn how to quickly recognize

the AB=CD pattern and apply it to some advanced pattern
formations such as the 222 Gartley, Butterfly and Three
Drives patterns.
Basic Pattern Analysis

AB=CD patterns (also know as Lightning Bolt Patterns) are

described as a rally in the market followed by a retracement. The
market will then rally again forming an up sloping parallel channel.

D A
B C

B
C
D
A

The same holds true in a declining market where the price action creates
two equal distant moves in a downward parallel direction.
Basic Pattern Analysis

The AB=CD pattern can be found in all markets and all time frames. It is
the foundation of the Gartley buy and sell patterns as well as the
Butterfly and Three Drives patterns we will discuss later.

It is important when studying these patterns to understand what

invalidates the pattern:

1. BC cannot exceed the AB leg

2. BC can be a 1.00 retracement of the AB leg. (This can be considered
a double top or bottom but is still a valid pattern.)
3. D must exceed B in order for the pattern to be complete.

Let’s look at some examples using our charts.

 Basic Pattern Analysis

We’ll start with an easy D

one. Can you seen the
AB=CD pattern?

B
In this case the BC
retracement was very
shallow, but as you can
see there is a clear C
AB=CD pattern here.
You will regularly hear
me refer to this as a
Fibonacci Failure
Pattern or a standard A
1:1 measured move.
 D

A
 D A

C
B

A
 A

The longer you spend in the market and the more time you
devote to the study of patterns the more proficient you will
become. Don’t get discouraged if you don’t see them right
away. Nothing of value comes easy.
Basic Pattern Analysis

How to Trade the AB=CD

Pattern
There are really two ways to trade the AB=CD pattern. They more or less
differ in how you draw in you Fibonacci retracement.

Upon completion of the AB=CD pattern a Fibonacci retracement will be drawn

either from the full length of A to D, or from the CD leg of the move. Initial
targets will be the .618 retracement of that fib.

However, once the market pulls back into the .382 retracement stops will
move to break even.

Lets have a look at an example in the EUR/USD

 D

Here we have a beautiful AB=CD pattern followed by a pullback. Let’s look

at both of the ways the draw in the fibs and talk about the differences.
In this first scenario we drew the fib from A to D and as you can see the
market has just pushed through the .382 retracement. In this case
stops would now be at break even and we would be looking for the .618
for a profit target.
In the second scenario we drew our fib from C to D and the market
has reached the .618. This is a more conservative approach to trading
the AB=CD pattern. Either way is fine as long as you do the same
thing each time.
Basic Pattern Analysis

Conclusion

The AB=CD pattern can be found in all markets and all time frames. It is one
of the most common and valuable patterns you will learn because it forms
the foundation of most advanced pattern formations.

The AB=CD pattern can be traded on its own or in conjunction with other
pattern formations such as the 222 Gartley and Butterfly patterns.

Questions?