I(ane Trading on:

Trading

ABeD
Patterns

by Jim I(ane
Tips, ideas and t�chniques for market traders
 Kane Trading on:
Trading ABeD Patterns

By Jim Kane

KaneTrading.com
Kane Trading on: Trading ABCD Patterns

Copyright © 2003 by James J. Kane

Published by Kane Trading

ALL RIGHTS RESERVED. No part of this publication may be reproduced,

stored in a retrieval system or transmitted in any form or by any means,
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without prior written permission of the publisher and the author.

This publication is designed to provide accurate and authoritative

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understanding that the publisher and the author are not engaged in rendering
legal , accounting or other professional services. I f professional advice or
other expert assistance i s required, the services of a competent professional
person should be sought.

Printed in the United States of America

Disclaimer

No claim is made by James J. Kane, or Kane Trading, that the trading

methods shown in this book will result in profits, or will not result in losses.
There is a substantial risk of loss in trading securities, options on securities,
futures, options on futures or any other trading vehicle. Past performance is
not indicative of future results. Trading securities, options on securities,
futures, options on futures or any other trading vehicle may not be suitable
for all recipients of this book. Always seek competent professional advice
when considering any trade. All examples in this book are for educational
purposes only. All material and examples in this book are based on
information obtained from sources that are believed to be reliable, but which
are not guaranteed as to their accuracy or completeness. Nothing in this book
should be construed, in any way, shape or form, as a solicitation of any offer
to buy or sell any trading instrument. James J. Kane, his family and friends,
and associates of Kane Trading have at times in the past and may now or at
times in the future, trade or have traded any or all of the issues used as
educational examples in the book. Any thoughts or opinions expressed in
this book are subj ect to change without notice. No information provided in
this book should be construed in any way as an encouragement by the
author, publisher or distributors to trade. Each trader must make his or her
own decisions with regard to trading. Each trader must be responsible for his
or her own decisions and his or her own actions, if any. Purchasing or
reading this book or parts thereof constitutes acceptance of and agreement to
this disclaimer and exempts the author, publisher and distributors from any
and all liability and litigation.

v
Table of Contents

Acknowledgements
.

IX

Introduction 1

Chapter 1 The ABCD Pattern 5

Chapter 2 ABCD Pattern Criteria 21

Chapter 3 ABCD Points at Fibonacci Areas 53

Chapter 4 Alternate ABCD Patterns 93

Chapter 5 ABCD Time Symmetry 135

Conclusion 149

VB
 Acknowledgements

In my evolution as a trader I ' ve read more material than I can even recall.
The majority of this material has contributed very little to my knowledge
base. That lack of value, for me, in the material, in and of itself, is important
information. It' s shown me, by a process of elimination, the things that don't
help me, and I can use that information when formulating a trading plan.

In developing material related to Fibonacci trading, two sources have been

of great help. I would like to acknowledge these sources, and recommend
that readers look into their materials. See if they might be of as much help to
your own trading, as they were to mine.

I ' d like to acknowledge Scott Carney over at Harmonic Trader. Scott' s book,
The Harmonic Trader, and the material on his website
(www .HarmonicTrader.com). opened my eyes to another way to view the
markets. This was my first substantial introduction to the concepts of
F ibonacci and harmonics in trading the markets. Scott has quite extensive
information on harmonic patterns on his website and has developed several
patterns of his own. Scott and I have since spent endless hours discussing
harmonics and the markets. His historical knowledge of the markets is
extraordinary and has contributed greatly to my own knowledge base.

I ' d also like to acknowledge Robert Miner at Dynamic Traders Group, Inc.
(www .DynamicTraders.com). Robert' s book, Dynamic Trading™, was my
next serious excursion into Fibonaccis and trading. This book is extensive
beyond belief. There is so much material in Dynamic Trading™ I would
have to consider it must reading for anyone interested in increasing their
knowledge of Fibonacci in trading and in Elliot wave analysis. Robert' s use
of the time factor is also extensive and will open one ' s eyes to factors
outside ofj ust price. Robert also has Dynamic Trader software available,
which I,use for creating charts labeled with various Fibonacci, harmonic and
time factors. It is the software that I used to create the charts for this book. I
would like to extend an additional thanks and acknowledgement to Robert
for allowing me to use these charts in my works. Information on his
products is available on his website. I recommend checking it out to see if
you feel that it has information that you can use to help your trading. His
contributions in the field are practically immeasurable.

IX
 Introduction

One way to determine a potential trade area is to look for a 'pattern' , and see
where it completes. There are, perhaps, more potential types of patterns than
'
there are traders. Traders have to decide for themselves which patterns, if
any, work for their own style of trading. I have found several patterns that I
particularly like for my own trading. One very simple pattern that I really
like is called the ABCD.

The ABCD pattern is simply a 'two-step' pattern, where price moves for a
bit, then 'corrects' , and then continues to move in the original direction. This
forms a pattern that looks somewhat like a 'zigzag ' , and the ABCD is
sometimes called a 'zigzag' pattern. When the pattern fits a certain set of
criteria it becomes much more useful for my trading, and it is in this context
that I will present the pattern and the variations that I look for.

The ABCD pattern goes by many different names, and has been presented in
many different ways, in many different contexts. In E lliot wave analysis
there is the ' abc' correction, and if it is a 'regular' or ' simple' correction, it
has relatively equal a and c legs, and is essentially the same thing as the
ABCD, as far as how it appears. In fact, the ABCD is sometimes referred to
as AB=CD by some sources. I don't particularly care for using AB=CD,
because, as you will see, the AB leg frequently does not equal the CD leg in
the pattern as I sometimes trade it.

I have also opted not to use the Elliot wave terminology of abc for the
pattern, for the following reasons. In Elliot wave analysis the abc is
generally used to label a wave 2 or wave 4 correction (most commonly a
wave 2 correction). The abc correction, in this context, does not necessarily
have to be a 'two-step' or 'zigzag' pattern to still be called an abc, and is
generally a correction to an existing trend.

Also, in Elliot wave analysis, the legs of the abc will also require a certain
wave substructure to them, and the ABCD pattern, as I present it, does not.
When I utilize the pattern that I will be presenting, it will always be a 'two­
step' or 'zigzag' pattern, and it does not necessarily have to be in the context
of a correction to a trend, although that is the most common context that I
trade it in.

1
This leaves me with calling the pattern the ABCD, and I think that is the
most common term I come across for this pattern. Perhaps I would be better
off 'renaming' what I will present here, since it will be somewhat unique,
with all the 'twists' I will add. I have decided to j ust stick with the term
ABCD, and hope that it is understood that this won't constrain me to follow
any of the ' guidelines' for similar patterns presented by any other authors.

Before I move on to the pattern, I want to make one thing clear to the reader.
This book is very 'Fibonacci intensive ' . I must make assumptions that my
readers have a very solid knowledge of Fibonacci retracements, both internal
and external, as well as an understanding of the concept of price projections.
I will also be using additional Fibonacci numbers that the reader may not be
familiar with. All of these retracement and projection concepts, as well as
the additional F ibonacci numbers that I have derived, are presented in detail
in my book Kane Trading on: Advanced Fibonacci Trading Concepts.

There is just no way I could produce this book without an assumption of this
prerequisite knowledge. I want to be clear, though, I did not do this so I
could sell more books. The ABCD pattern, as I present it, requires
knowledge of these techniques. There is just no way around that. And since I
use many additional Fibonacci derived numbers in my own trading, I must
use them in presenting the techniques that I use. This requires me to use
these additional numbers in this book.

The scope of this book does not allow me derive all these numbers here, as
that was done in Kane Trading on: Advanced Fibonacci Trading Concepts.
If the reader wants to just take the additional numbers used here, and use
them without knowing how they were derived, that is up to the reader. I
strongly suggest, though, that you fully understand where something comes
from before you consider its use. Regardless of that consideration, the
derivations of these additional numbers are not required to understand the
ABCD pattern.

Finally, I want to be clear that this pattern is used, in my trading, to help me

find potential trade areas, what I call PTA's. It is important for the reader to
understand how this fits into the ' Plan for a Trade' (the so-called ' Critical
Elements of a Trade'), and the master 'Trading Plan ' . This is outlined in two
free articles on the Kane Trading website, entitled: Kane Trading on: The
Critical Elements of a Trade and Kane Trading on: The Difference Between
a 'Plan for a Trade' and the ' Trading Plan' .

2
These articles will give the reader the background to understand the context
of the 'potential trade area' within my overall game plan. I ask that the
reader read these articles before proceeding forward. With that said, let's
move on to the pattern.

3
 Chapter 1

The ABeD Pattern

Let me start right out with a diagram of what I mean when I say 'two-step'
or 'zigzag' pattern. It' s important to be able to visualize, if even only in the
broadest sense, what this pattern looks l ike. See figure 1 . 1 .

Figure 1 .1

DA

c B

A D

Notice that the pattern looks just like a 'zigzag ' . The issue moves, it
corrects, and it moves again, in a move that looks very similar to the initial
move. As the diagram shows, too, the pattern can be established in both an
uptrend and in a downtrend.

The ' standard notation' used for the ABCD pattern is to label the points with
letters, in this case the capital letters A, B, C, and D. Hence, a given leg can
be referred to by the two letters that �omprise the leg. So, for example, the
last leg would be called the ' CD' leg, and so on. Let's take a quick look, for
comparison, at how the same exact patterns in figure 1 . 1 would be labeled in
Elliot wave terms. See figure 1 .2.

5
Figure 1.2

In Elliot wave labeling, the legs are given a single letter as a label, and for
corrective waves such as this, the letter will be an italicized, lower case G, b,
or c. This keeps the labeling in line with the labeling of impulsive waves
with numbers, such as wave 3 , and so on. This is, of course, an
oversimplification of Elliot wave labeling, but the point I am trying to make
should be clear. In Elliot labeling, each leg gets a single number or letter to
represent it.

In ABeD patterns, and in fact for all the larger scope pattern trades that are
formulated around the ABeD pattern, the legs are represented by two letters,
which are determined by the end points of the leg. There are a host of
patterns with very cool sounding names that start at a point, usually called
the 'X' point, and move to the 'A' point, and then form an ABeD pattern,
which terminates at some retracement of the XA leg. Depending on which
pattern it is this can be either an internal retracement or an external
retracement of this XA leg.

Since all these ' named patterns' are outside the scope of this book, I will just
focus on the ABeD pattern itself. I want the reader to be aware, though, that
the ABeD pattern forms the basis of a slew of larger scope patterns, patterns
that form the basis for entire trading styles for some traders. When I get to
the chapter on ABeD points at Fibonacci areas, I will get into some of the
concepts and details that have led to the coining of these larger scope
patterns.

6
Now that we know what an ABCD pattern looks like, at least in
diagrammatic form, let' s look at a few examples on some charts. I have seen
and used this pattern on pretty much all timeframes, so I will try to vary the
timeframes on the examples that I will use throughout this book. Let's start
with a simple example in YHOO. Try to spot the ABCD pattern on the chart,
and then I 'll point it out. See figure 1 .3 .

Figure 1.3

::''1. YHOO D-D I!!GI £J

1 1 0 .000

100.000

0 . 000

70. 000

0 . 000

0 . 000

0 . 000
22 29 0ct 13 20 27 Nov 10 17
Chart created by Dynamic Trader (c) 1 996-2001

It should be pretty obvious. YHOO begins a correction in mid-October, pulls

back, and then continues the correction up. This forms an obvious 'two-step'
pattern. YHOO then resumes its downtrend. Let me draw in the 'zigzag' .
See figure 1 .4.

7
Figure 1.4

?: YHOO 0-0 1!!!18 EJ

1 1 0.000

100 . 000

D
70. 000

22 29 0ct 13 20 27 Nov 10 17
Chart created by Dynamic Trader (c) 1 996-2001

The first thing I notice when I look at this 'zigzag ' , as compared to the
diagrammatic 'zigzag', is that it' s not quite as ' symmetrical' . Although I
prefer textbook symmetry, I rarely find it in real-world examples. As this
book progresses, you will learn what criteria I use to evaluate a potential
ABCD pattern. Although symmetry is important, it' s not the most important
criterion.

Let's examine the symmetry here, though, before I move on with this
example. What makes the 'zigzag' asymmetrical? Well, the CD leg is not
rising as steep as the AB leg. The uptrend is not as strong in this second leg
as it is in the first leg. Look at the time relationship of the AB and CD legs,
too. The AB leg spans four bars, and the CD leg spans nine. If these legs
were time symmetrical, the number of bars would be equal. I prefer to see a
fairly close number of bars in the AB and C D legs, but I won't pass a trade
over based on just this one factor.

And how about the CD leg? Do you see it as longer than the AB leg? If so,
you're about to be surprised. Longer doesn't mean the CD line I've drawn
on the chart is longer than the AB line, it means having a greater price move.

8
Look again, and try to decide if you think the CD price move was lesser,
equal, or greater than the AB price move. Let's move on with the example,
and I ' ll label the ABCD with the 1 .000 price projection (that is, AB=CD),
and we' ll quantify that CD leg with respect to the AB leg. See figure 1 .5 .

Figure 1.5

::.-:: YHOO D-D B8 £J

1 1 0.000

1 00 . 000

D
---;-.t-'�r---- 70.053 App 1 .000 70. 000

A
{
22 Oct 13 20 27 Nov 10 17
Chart created by Dynamic Trader (c) 1 996-2001

Interesting, isn't it? The CD leg is almost exactly the same price move
amount as the AB leg, despite what your eye may tell you at first. It
generally takes a lot practice and experience to pick out the patterns with
price symmetry if the 'zigzag' lines aren't symmetrical. I will return to this
YHOO example later, as we explore more of the details and criteria of the
pattern. For now, let's j ust look at what happened with YHOO from this
point. See figure 1 .6.

9
Figure 1.6

v
?: YHOO D-D !IS £J

k "r-+-4-+'- °=---
_______________
_ 70.063 App 1.000

30 . 000

20 . 000

Nov Dec 01 Feb Mar f>

Chart created by Dynamic Trader (c) 1 996-200 1

YHOO really dropped off after this ABeD pattern. It went from over $70 to
around $24 before making any kind of significant correction. After that
correction from the $24 region up to around $43, YHOO resumed its
downtrend until the $ 1 1 area before the next significant correction to the
downtrend. And after that correction, the downtrend continued even lower.

Now, I am saying all this was because of an ABeD pattern? No, far from it.
YHOO had already lost over 80% of its value by the time this ABeD came
along. What I am saying is that sometimes when an issue is in a trend,
corrections can come in the form of ABeD patterns, and these patterns have
helped me to find areas where I might consider taking a trade, in the context
of my overall 'Trading Plan '.

Let's move on to a few more examples of ABeD patterns. Let's look at a

chart of T on a daily timeframe. See if you can spot the ABeD pattern in the
unmarked chart. See figure 1 .7.

10
Figure 1.7

Fj
?: T D-D I!!!I(;U3

fJ
1 . 000

+
tF}�hfilII h
0 . 000

H ltJ
1)]1
39 . 000

l l j
38 . 000

l
ttll!!i)}l f I
t!
37.000

lj
1 I
36. 000

jJ
35 . 000

tul H1JJ}It IF
34 . 000

33.000

32 . 000

31 . 000

12 19 2f, Nov 9 1f, 23 30 Dec 14 21 28 Jan 11

Chart created by Dynamic Trader (c) 1996-2001

The ABeD should pretty much 'pop out' at you, but in case you can't quite
pick them out yet, I ' ll label it on the chart. See figure 1 .8 .

11
Figure 1 .8

Fj
?, T D-D 1!113 F3

f]
1 . 000
0

1
0 . 000

1
j ttl
�h
39. 000

iP
j
B 38 . 000

37. 000

) j� jl
II) t
36 . 000

it l hill
35 . 000

34 . 000

it 1
33. 000

C
32 . 000

31 . 000

30 . 000
A

12 19 26 Nov 9 16 23 30 Dec 14 21 28 Jan 11

Chart created by Dynamic Trader (c) 1 996-200 1

This ABCD pattern i s very symmetrical, time-wise, and as far as the

comparative slopes of the AB and CD legs. Although the symmetry is not
exactly perfect, thi s i s as close as I realistically expect to see. Let's look at
how closely the price move in the CD leg matches the price move in the AB
leg. I ' l l add the 1 .000 price proj ection onto the chart. See figure 1.9.

12
Figure 1.9

1 . 000
D 0 . 000
-------,.-- 39.447 App 1 .000
39.000

38 . 000

37. 000

36. 000

35 . 000

34. 000

33. 000

c
32 . 000

3 1 . 000

30 . 000
A

12 19 26 Nov 9 16 23 30 Dec 14 21 28 Jan 11 1

Chart created by Dynamic Trader (c) 1 996-200 1

As it turns out, the price move in the CD leg just about perfectly matches the
price move for the AB leg. This i s a near 'textbook' ABCD pattern. Let ' s
move o n and see how T reacted to the completion o f this pattern. See figure
1 . 1 0.

13
Figure 1 .10

)fj
:::;. T D-D !IS J!'I
1 . 000

it
D 0 . 000

tJl
39.447 App 1 .000
39. 000
38 . 000
37. 000

JIll!
I l¥h�
36. 000

35 . 000
34.000

t{tl
ft 33.000

c 32 . 000
3 1 . 000
30. 000
A
29.000

28 . 000
12 19 26 Nov '3 16 23 30 Dec 14 21 213 Jan 11 113 25 Feb 13 1�
Chart created by Dynamic Trader (c) 1 996-200 1

T really fell off after completing this ABCD correction. Now, can I conclude
here that the reason that T continued selling at this point was because an
ABCD pattern was completed? No, of course not. What I conclude is that,
for my trading, this pattern is frequently useful in helping me find areas
where I think something might happen. Areas where I feel I might have an
edge. Let's look at more data on T to see where it went from here. See figure
1 .1l.

14
Figure 1.11

---i':---- 39.447 App 1.000 0 . 000

35 . 000

30 . 000

25 . 000

20 . 000

1 5 . 000
Nov Dec 02 Feb Mar Apr May Jun Jul
Chart created by Dynamic Trader (c) 1 996-2001

T continued quite a downtrend after the completion of that ABeD pattern,

losing well over half of its value from that point. In this case, the ABeD
pattern completed at a point where a significant move was about to begin. In
my opinion, and this is just an opinion, this is not a coincidence.

Let' s look at one more example of the ABeD pattern, before I move on to
the next chapter and get into the details and characteristics that I like to see
in an ABeD pattern. See figure 1 . 1 2.

15
Figure 1.12

?. M 0-0 I!IGU!'J
1 8 . 500

1 8 . 000

1 7 . 500

1 7 . 000

1 6 . 500

1 6 . 000

1 5 . 500

1 5 . 000

1 4 . 500
19 26 Jui 10 17 24 31 Aug 14 21 28
Chart created by Dynamic Trader (c) 1 996-2001

Can you see the potential ABCD pattern in this AA chart? This one is a l ittle
bit trickier because the CD leg is significantly shorter than the AB leg, time­
wise. I am purposefully choosing examples that are not all 'textbook', so
you can see what you may be faced with as you look for these patterns. 1'11
label the pattern so you can see it more clearly. See figure l. 1 3 .

16
Figure 1 .13

?. Aft. 0-0 EIl3 £'J

A
1 8 . 500

1 8 . 000

C 1 7 . 500

1 7 . 000

1 6 . 500

1 6 . 000

f1
1 5 . 500

1 5 . 000

1 4 . 500
0

1'1 25 Jul 10 17 24 31 Aug 14 21 28

Chart created by Dynamic Trader (c) 1 996-2001

Just l ike the first example with YHOO, this example has ' mismatched' time
symmetry between the AB and CD legs. This time, though, the difference i s
reversed. I n the YHOO example, the A B leg was significantly shorter than
the CD leg, time-wise. In this AA example, the AB leg i s significantly
longer than the CD leg, on a time basis. You can find every possible
combination of time relationships with these patterns.

You might be asking 'How can there be any more possibilities than the two
you just mentioned?' Well, we haven't considered the time span of the BC
leg. Other than the obvious observation that the BC leg has been the shortest
leg time-wise and price-wise, we have no idea what we would like the BC
leg to be doing. I will get into details on price aspects of thi s BC leg in the
next chapter, and I will get into more detail on time symmetries for all the
legs in a later chapter.

17
I'll put the 1 .000 price proj ection on the chart to see how close the price
move of the CD leg is to the price move of the AB leg. See figure 1 . 1 4.

Figure 1.14

?. M I) -I) I!S £J
A
18 , 500

18,000

C 1 7 , 500

17 , 000

16 , 500

16 , 000

B 15 , 500

15 , 000

14 , 500
D
19 26 Jul 10 17 24 31 Aug 14 21 28
Chart created by Dynamic Trader (c) 1996-2001

We are starting to see a repeating pattern here. A good part of that, of

course, is due to the fact that I'm choosing these examples because they are
j ust that, good examples. Not all patterns have a nice 1 .000 price proj ection
reversal .

Sometimes this implies that the price action is not doing what I want it to do,
and hence I won't consider a potential trade. Other times, though, this failure
of a 1 .000 price proj ection reversal can be j ust fine for me. It can lead to a
variation on the pattern, which I will cover in a later chapter on alternate
ABCD patterns.

Let's look at AA one more time, with additional data, to see how it
responded in this area. See figure 1 . 1 5 .

18
Figure 1 .15

?. M [)-D B8£!

20 . 000

19. 000

18 . 000

1 7 . 000

16 . 000

15 . 000
--1----- 14.531 App 1 .000
D
14.000
1'3 26 Jul 10 17 24 31 Aug 14 21 23 Sep 11 13 25 Oct '3 j
Chart created by Dynamic Trader (c) 1996-2001

AA reversed hard upon completion of the pattern. It went up over 40%

before it did a more significant pullback than any of the pullbacks seen on
thi s chart after point D. Again, thi s move didn't happen because of the
ABeD pattern. Instead, the ABeD pattern allows me to find potential trade
areas, areas where I think something might happen, and where I might
consider taking a trade.

I think the basic structure of the ABeD pattern should be pretty clear to the
reader at thi s point. I will now move on to describing the details of what I
look for within this general framework, to make my own personal dec isions
on what are ' good enough conditions' for me to consider a potential trade
with this pattern.

19
 Chapter 2

ABCD Pattern Criteria

ABCD patterns can come together in a variety of ways. The most obvious
variable, to me, would be how large the retracement of the AB leg is. (This
retracement forms the B C leg, which completes at the C point.) The B C leg
can do a very shallow pullback of the AB leg, perhaps a .236 retracement, or
it can retrace all the way back to an .886 retracement. It can also retrace
anything in between those numbers, or even outside of them. Although these
very shallow and very deep retracements would not preclude an ABCD
pattern from forming, perhaps their usefulness for trading is not the same.

I have experimented and decided what criteria I l ike best for trading the
ABCD pattern. I am not about to say, at all, that these are 'the best' criteria.
In fact, if you follow the Kane Trading methodology at all, you already
know what I am going to say. You need to do your own study and
experimentation and decide what, if any, variation(s) of this pattern work(s)
for you and your own unique trading style, as well as your ' Trading Plan ' . I
will present what I have found works best for me and my style.

The AB leg retracement, which forms the B C leg and completes at the C
point, is the first thing I look at when I see a potential ABCD pattern start to
develop. Although I have seen many, many beautiful ABCD patterns play
out with a shallow .382 or .447 retracement, I prefer a deeper retracement
for my own trading. I would l ike a .6 1 8 retracement as my preferred choice,
or thereabouts. I also l ike retracements in the .500 area and sometimes even
as deep as the . 786, although the latter is getting on the deep s ide for me.

21
Let's look at an example with a .6 1 8 retracement. First, I ' ll show GIS as it
sets up what looks like a potential ABeD correction in an uptrend. See
figure 2 . 1 .

Figure 2.1

?. GIS O-D 158 £'J

30. 000

29. 500

29 . 000

28 . 500

28 . 000

27. 500

27. 000

26 . 500

Aug 9 if> 23 30 Sep 13 20 27 Oct 11 18 25

Chart created b y Dynamic Trader (c) 1 996-2001

So far we have a very nice ABeD pattern forming. Let' s see what the
retracement of the AB leg is. This retracement forms the Be leg. See figure
2.2.

22
Figure 2.2

?'. GIS D-D I![;I £J

30. 000

29. 500

29 .000

28. 500

28 . 000

27. 500

27. 000

26 . 500

26.000
26 Aug ') 16 23 30 Sep 13 20 27 Oct 11 18 25
Chart created by Dynamic Trader (c) 1 996-2001

The retracement was right at the .6 1 8 . Thi s i s the area that I prefer the most
for AB leg retracements i.e. C points. Let's add the 1 .000 price projection
onto the chart, to see the area where we are looking for the ABCD to
complete. See figure 2 . 3 .

23
Figure 2.3

?, GIS D-D I!I3 £J

30 . 000

29 . 500

29 . 000

28 . 500

28 . 000

27.500

27.000

26 . 500

Aug '3 11', 23 30 Sep 13 20 27 0ct 11 18 25

Chart created by Dynamic Trader (c) 1 996-2001

The ABeD pattern completes just below the current price action. Let' s add
some more data, and see how GIS reacts to the area. See figure 2.4.

24
Figure 2.4

30 . 000

29. 500

29.000

23.500 App 1 .000 28 . 500

28 . 000

27. 500

27. 000

Aug 'l 16 23 30 Sep 13 20 27 0ct 11 18 25 Nc

Chart created by Dynamic Trader (c) 1 996-200 1

So far, GIS has started to reverse right off the completion point of the ABeD
pattern. It' s hard to see on the chart, but the last price bar's close overlaps
the horizontal l ine used for the retracement and projection calculations. This
puts the close in the upper 25% of the bar. Let's move ahead one more bar,
and see how this is playing out. See figure 2 . 5 .

25
Figure 2.5

?: GIS 0-0 I!!!IS £'J

30 . 000

29.500

29. 000

28 . 500

28. 000

27.500

27.000

26 . 500

Aug 9 if, 23 30 Sep 13 20 27 Oct 11 18 25 No\

Chart created by Dynamic Trader (c) 1 996-2001

Well, that sure makes one wonder if this pattern is going to hold. GIS gaps
down and opens right on the 1 .000 price proj ection, to the penny. It' s hard to
see the opening hash mark on the price bar due to the horizontal line for the
proj ection, but it i s right at $28.50. This would not threaten any stop I would
likely have in place, since I tend to put my stops j ust below the potential
trade area. And, depending on your entry trigger, you may or may not even
be in the trade at this point.

It is interesting to note, though, that trying to interpret the price bar action at
this point is very challenging. GIS threw a doj i bar at the completion point,
and then another doj i with a large upward tail. Then it followed with a strong
bar up that had a strong close. B ut then GIS gapped down, only to reverse
and finish at the top of the bar. So this is strong, right? Who knows ! This bar
action is all over the place.

That's why I like to watch the bar action, but not take it too seriously for my
trading. I like to look at each issue over time and decide how reliable and
relevant to the trading I think the immediate bar action is. In my experience,
GIS is fairly choppy and the immediate bar action is very unreliable. Hence,

26
my focus is on the potential trade area and my particular entry technique, as
well as my pre-determined stop loss point. For the most part, I ignore the
opens and closes of the bars themselves.

Let's see how this played out. See figure 2.6.

Figure 2.6

;,:. GIS 0-0 II!!B £J

32 . 000

3 1 . 000

30. 000
29.811 Ret 0.&13

29 . 000

28 . 000

27. 000

26 . 000
26 Aug 9 16 23 30 Sep 13 20 27 Oct 1 1 18 25 Nov 8 15 22 2�
Chart created by Dynamic Trader (c) 1 996-2001

This ABCD correction did point to an area that was quite significant from a
trading standpoint. GIS went on to reach over $34 before the immediate
trend reversed. Again, did GI S rocket up because of the pattern? Of course
not. Patterns can't make issues go up; buyers make issues go up. B ut
patterns can give me ideas where I might consider a trade, because I suspect
something might happen there.

I am going to move on to another .6 1 8 AB leg retracement example, this

time on an intraday timeframe. But I want to point out, we are not even close
to done with explaining all the aspects of what I look for in an ABC D
pattern, so I will b e coming back to this example i n GIS, as well as many of

27
the other examples. Let' s look at a potential ABCD pattern on a IS-minute
timeframe chart in the S&P e-mini. See figure 2 . 7 .

Figure 2.7

J\
?: ES03H 15·1 !lEI Ell

&t 7f FeblOm
Chart created by Dynamic Trader (c) 1 996-2001

The mini is in a downtrend on this timeframe, and is setting up what looks

l ike a fairly nice ABCD pattern. The assumption I am looking at is that the
mini wi l l continue its downtrend after the ABCD correction completes. F irst
let's look at the retracement at the C point. This i s the 'BC retracement of
the AB leg' . See figure 2.8.

28
Figure 2.8

?. E S 03H 15-( 1!!13 £1

60.000

55.000

50.000

f
45.000

40.000

)�
35 .000

30 .000
-----=-- 827.789 Ret 0 .518

25.000

5t 7f Febl0m
Chart created by Dynamic Trader (c) 1996-200 1

The pullback was almost exactly at the . 6 1 8 retracement; in fact it was

within less than one tick. Let' s add in the 1 .000 price projection, and then
we'll see how the mini reacted in that area. See figure 2.9.

29
Figure 2.9

?. ESOlH 15-( !IS£!

f
- 842 .500 App 1.000

� 827J" '0< 0.'"

6t 7f FeblOm
Chart created by Dynamic Trader (c) 1 996-200 1

The mini has just a little ways to go before the potential trade area. Let's add
in a few more bars, and see what happens. See figure 2 . 1 0.

30
Figure 2.10

?'. ES 03H 15-1 1!!Ir=I D

842 .500 App 1 .000

6t 7F Febl0m 11
Chart created by Dynamic Trader (c) 1 996-200 1

The mini reversed hard right off the completion point of the ABeD. It looks
like this trade is really going to play out nicely. Let's move ahead four bars,
and reassess. See figure 2 . 1 1 .

31
Figure 2.11

?1. ES 03H 15-1 !IS £I

-t--r- 842 0500 App 1 .000

6t 7f Feb 10m 11t

Chart created by Dynamic Trader (c) 1996-2001

Well, that doesn't look all that good. The mini reversed right off the ABeD
pattern completion, and then turned right around and started back up. This is
why you never trade without pre-determined stops. I f the mini keeps going
up it will catch my stop, and that will be that.

I generally have my stop set j ust above the potential trade area for short
trades Gust below for long trades), so I would not be stopped out at this
point, but I'm on the alert and ready. If my stop i s set mechanically, all I can
do is sit back and watch. The one thing I do notice i s that the last bar closed
near its low, and has an upward tail. Let's look at the next bar, and see what
happens. See figure 2 . 1 2.

32
Figure 2.12

?. ES03H 15-( 11!!18 E1

-+--r- 842 .500 App 1.000

--!::=:== 827.7101'3 Ret 0.G18

6t 7f Feb10m 1 11
Chart created by Dynamic Trader (c) 1 996-200 1

OK, the mini has 'tested' the potential trade area twice now, and is starting
back down. My stop would not have been hit, and I' d still be managing the
trade as it unfolds. Let' s see how thi s one played out. See figure 2 . 1 3 .

33
Figure 2.13

?: E S 03" 15-1 "

I!EI £J

--t-.----- 842.500 App 1.000

--'----..;./,+fi+*Ht---:---- 827,789 Ret 0,&13

&t 7f Feb 10m llt 12w 13t

Chart created by Dynamic Trader (c) 1 996-2001

As it turns out, that little move up was j ust a small 'headfake' , and down the
mini went. This ABeD pattern, again, pointed to an area where a potential
trade was setting up. It should be clear by now why I l ike this pattern so
much, and why I keep such a close watch out for it in the issues that I watch.
I will refer back to this example later on, too, since there is more going on
here that I want to point out. Much more.

Let's look at one more retracement example, and then we'll move on to the
next criterion that I look for. Let's look at an example in A VY. See figure
2. 1 4.

34
Figure 2.14

?. AVY I)-I) !l9£1

{ j 1 j I III j
1 . 000

0 . 000

� 1
ttII
t 9 . 000

Ij
)j 1
8 . 000

flJ
7 . 000

1
21 28 Oct 12 19 2&
Chart created by Dynamic Trader (c) 1 996-200 1

AVY is in an uptrend, has pulled back, and i s forming a potential ABCD

pattern. As I see thi s potential pattern start to form, the first thing I do is see
how close the pattern looks to a perfect 'two-step' or 'zigzag' . Next, I check
the retracement of the AB leg (the C point retracement). I see where it is,
and if it i s turning at a F ibonacci number. This doesn't mean that I won't
consider taking the trade if the turning point isn't exactly at a F ibonacci
number. It' s just that the closer it is, the more confidence I have in the trade.

Following this, I put down several numbers for the potential completion
point of the pattern. I want to have this point supported by multiple
Fibonacci numbers, preferably a nice, tight grouping, as outlined in Kane
Trading on: Advanced Fibonacci Trading Concepts. Then I look at how
close the B point is to any F ibonacci numbers, keyed off of multiple swings
(more on this later).

F inally, I look at the time symmetry, and weigh that into the m ix, although
not very heavily, as compared to the other factors. This is the sequence that I
am following as I present this material to the reader. I point this out here so

35
that the reader will understand what i s unfolding, and why it is unfolding in
the order that it is.

Let' s continue on with this AVY example. I ' ll add the retracement of the AB
leg to the chart. See figure 2 . 1 5 .

Figure 2.15

_�\'·A-.UI. _ c.lx.!
-5 1 . 000

50.155 Ret 0.78&

-50 . 000

11
)j
f'49 . 000

1I
f'48 . 000

J1 r) f f'47.000

j I fll f'46 . 000

f'45 . 000

f'44 . 000

21 23 0ct 12 19 26
Chart created by Dynamic Trader (c) 1 996-200 1

The C point formed at almost exactly a .786 retracement, in fact it was

within just about five cents. I purposely chose this example because,
although I don't rank the deeper .786 C point ABCD' s as my favorite, they
can set up some spectacular trades, and I do trade them at times. I leave it to
the readers to experiment and decide what parameters, if any, work for them.
As in the other examples, I ' ll add in the 1 .000 price proj ection and then
we'll see how this played out. See figure 2. 1 6.

36
Figure 2.16
•
_�"Ji�.U!I J
rs 1 .000
._Iolx

50.155 Ret 0.786

rsO.OOO

l1
Jj
M9.000

t I 1I
1 f
f4s. ooo

1
f47.000

Ij j lJ f46.000
46 .340 App 1.000

-45.000

-44.000

21 28 0ct 12 19 26
Chart created by Dynamic Trader (c) 1996-2001

The potential trade area i s j ust below the current price action in AVY. Let's
move ahead one more bar, and assess the situation. See figure 2 . 1 7.

37
Figure 2.17

?. AVY D-D I!![;l £I

[51 .000
50.155 Ret 0 .78&
rso.ooo

11
f49.000

1I
f4S.ooo

f1
1t Ijtf 1
[47.000
46.340 App 1 .000
f46.000

f4S.000

;44.000

21 28 Oct 12 19 26
Chart created by Dynamic Trader (c) 1996-2001

This does not look promi sing. We have a down bar with a close on the low,
right at the potential trade area. Perhaps some of the readers recognize this
time in the market. I point this out here because it has some significance.
This is the period right after the 91 1 1 terrorist attack.

Many people were extremely bearish, and it sure looks like AVY is prepared
to continue down and set yet another new low for the move. But I noticed
that there were more than a few i ssues showing setups like this one in AVY.
Sometimes the big moves start in areas where the general public has little
confidence. Let's add another bar to thi s chart, and reassess. See figure 2 . 1 8.

38
Figure 2.18

1IKWN'.I9i1'l!, - C.JXJ
-51.000
50.155 Ret 0 .786
-50.000

11
Jj
-49.000

1I
)j j )
-48.000

f1
1 1
-47.000

I j
46.340 App 1 .000
-46.000

-45.0 00

-44.000

21 28 Oct 12 19 26
Chart created by Dynamic Trader (c) 1996-2001

What a difference a bar can make. AVY is reversing solidly off the ABeD
completion point. This is no assurance that the move will continue, but what
looked l ike a sure blowout of the potential trade area has turned into what
now looks like a great trade, in one bar. 1'11 add in a lot more data, and show
how this played out longer term. See figure 2 . 1 9.

39
Figure 2.19

?. AW D-D I!![;l £.1

70.000

5.000

-,--d-�---- 50.155 Ret 0 .786

--1.1------ 46.340 App 1 .000

Oct Nov Dec 02 Feb Mar Apr M .. y

Chart created by Dynamic Trader (c) 1996-2001

A VY went up strong off that ABCD completion point. How much of this
up-move would have been caught by a given trader cannot be quantified, but
suffice it to say that there was plenty of potential in this move. What l ooked
l ike a likely new low coming up, turned out, in fact, to be an incredible
potential long opportunity. And the ABCD pattern highlighted a potential
trade area in the very early part of the move.

Before we move on and add another criterion to the pattern, I want to make a
point about my use of the term 'potential trade area' . I have been using the
term here to describe the completion point of the ABCD pattern. In general,
a potential trade area is j ust that, an area. When I originally coined that term
for use in my trading, it came from my development and use of the
'groupings' technique, as outlined in Kane Trading on: Advanced Fibonacci
Trading Concepts (and since it's getting tiring for me, and undoubtedly my
readers, I ' l l just refer to that book as AFTC from now on.).

Groupings form small, tight areas where a trade may be considered. To form
an area, though, you need a group of numbers all falling in approximately
the same place. This forms the area, which you might trade against. For me,

40
the more numbers in a small area, the better. In my mind, each number adds
to the potential support or resistance that the area may have. I rarely take
trades with only one or two numbers in an area, such as trading against a
single retracement. I prefer a large grouping of numbers to trade against.

My point is that I have only used this term, potential trade area, here,
because I know that before I am done presenting this material, we will have
multiple numbers in the area. I f we don't, I won't consider the area as a valid
potential trade area. It won't meet my criteria. So, although the use of the
term i s premature at this point, as long as the reader knows what we are
working towards, and doesn't adopt the use of the term where it would be
inappropriate, it should be all right to use it as I have so far.

With all that said, let' s move on to forming our first potential overlay of
numbers, forming the start of our first 'grouping' . Again, and I point thi s out
without in any way trying to ' sell more books', the sense, and technique, of
creating groupings i s clearly laid out in AFTC. That book really
complements the work that we are doing here on the ABCD pattern.

I am limited in how much I can get off topic in this work to fill in
background information on how to construct groupings, and how I trade
using them. Hence, I am assuming my reader understands how I am doing
this part of the process. I am simply trying to point out that if you have
trouble following those aspects of the process, it i s not due to a deficiency in
this work, but more l ikely because of missing prerequisite knowledge. I am
only trying to point out one potential source of that prerequisite knowledge.

The next step in the process is to do an external retracement of the BC leg. I

am looking for a F ibonacci number to fall very close to the 1 .000 price
projection, what I have been calling the ABCD completion point. This
would put two numbers in the potential trade area, further increasing, for me,
the reversal potential of that area.

41
Let's return to the GIS example. I'll show the chart in figure 2 .3 again, to
refresh our memories. See figure 2 .20.

Figure 2.20

?. GIS 0-0 !IS £I

30.000

29.500

29.000

28.500

28.000

27.500

27.000

26.500
Aug 9 1& 23 30 Sep 13 20 27 0ct 11 18 25
Chart created by Dynamic Trader (c) 1996-2001

This is how we saw GIS as it approached the completion point of the ABCD.
It also shows the C point retracement right at a .6 1 8. I now want to add in
the external retracement of the BC leg.

At this point an interesting mathematical thing happens. If we are looking at

a .6 1 8 retracement for the C point, and also at the AB and CD legs being
equal (that is, AB=CD), then what external retracement will land on the
1 .000 price projection? I understand that, right now, you are probably
wondering what I am talking about.

Let me try to explain. It' s just a geometric relationship that if you have an
ABCD pattern where AB=CD, whatever the C point pullback amount is, the
reciprocal of that amount, used as an external retracement of the BC leg, will
land exactly on top of the 1 .000 price proj ection. Hence, if the C point
retraces to the .6 1 8, the 1 .6 1 8 external retracement of the BC leg will land

42
exactly on top of the 1 .000 price projection. If the C point retraces to the
.786, then the 1 .272 external retracement will land right on the 1 .000 price
projection.

Since I was, at one time, a high school math teacher, I could quite easily
draw out diagrams and show why thi s is so, but I don't think the reader has
to have this information to use the technique. For this reason I will spare my
readers this agony, and leave it at that. Now, why do I care about this, except
that it is a fun l ittle mathematical factoid?

I care because I want the external retracement of the BC leg to be as close to

the 1 .000 price proj ection (the ABCD completion point) as it can be, and the
closer the retracement of the AB leg i s to a Fibonacci number, the closer my
external retracement will be to where I want it to be. The previous
'harmony' seems to carry forward and contribute to future Fibonacci
'harmony' .

I find the tightest groupings come from issues that have had tight previous
groupings leading to the grouping under consideration. This is another way
of saying the i ssue is 'harmonic ' . So, let's note that in the GIS example the
C point retracement, which i s the retracement of the AB leg, is pretty much
right at the .6 1 8 . Hence, I would expect the 1 .6 1 8 external retracement to
land j ust about exactly on top of the 1 .000 price proj ection.

43
First, I will show j ust the 1 .6 1 8 external retracement of the Be leg, so that it
will be clear what it is I am doing. I will then show this retracement with the
1 .000 price proj ection on the same chart. See figure 2 .2 1 .

Figure 2.21

jt) f jJ{ t )
:::1. GIS D·D !IS£!

�
30.000

l �
29.500

�tfH
29.000

,t}JHtf{
28'9$ '" '61' 28.500

28.000

27.500

1)
27.000

26.500

26.000
Aug '3 1& 23 30 Sep 13 20 27 0ct 11 18 2
Chart created by Dynamic Trader (c) 1996-2001

I will now add the 1 .000 price proj ection onto this chart. I am expecting that
the overlap will be nearly perfect, and that the lines will be difficult to
differentiate. Let's see how close this i s to what actually happens. See figure
2 .22.

44
Figure 2.22

?" GIS 0-0 I!I3 £J

30.000

29.500

29.000

-- 2S.!le13 � U(WD 28.500

28.000

27.500

27.000

26.500

26.000
Aug '3 1& 23 30 Sep 13 20 27 Oct 11 1S 2
Chart created by Dynamic Trader (c) 1996-2001

As expected, the overlap is just about exact. It would have to be, given the
mathematical relationship that I j ust described. What this tells me, as a
trader, is that we have a near perfect .6 1 8 C point retracement, and a
completion point, a 'potential trade area' , with a near perfect 1 .6 1 8 external
retracement overlapping the 1 .000 price proj ection. Thi s increases my
confidence level in the potential trade.

I won't be ready to consider thi s potential trade until I have more numbers in
thi s area, and possibly some other F ibonacci alignments, but this current
overlap allows me to continue the screening process. Let' s move on and look
at a few other examples of BC leg external retracements before we add the
next criterion to the pattern.

45
We'll return to the I S-min chart of the mini, and follow the same procedure
that we just did with GIS . First, let me show the same chart as in figure 2 .9,
to refresh our memories on how this one looks. See figure 2 . 2 3 .

Figure 2.23

?: [S03" 15-1 1!!113J F!J

f
842 .500 App 1.000

)1��LI
-

---== 327 .73·� Ret O .U8

6t 7f Febl0m
Chart created by Dynamic Trader (c) 1996-2001

I wi ll add the 1 .6 1 8 external retracement for the BC leg onto the chart, since
the C point is a .6 1 8 retracement. Again, I am expecting a near perfect
overlap with the 1 .000 price proj ection. See figure 2 .24.

46
Figure 2.24

?. ES03H 15-( 1I!!13 E'J

)� '" ." ., R" 0.&1'

6t 7F FeblOm
Chart created by Dynamic Trader (c) 1996-2001

Now, that's really nice. You have the two l ines almost on top of each other,
but not quite. That makes this a really good example for my purposes. It
leads to a great question that I hope my readers are already asking. Why
aren't the numbers just about exactly on top of each other, like the last
example?

The answer is right there on the chart. The C point retracement is j ust shy of
the .6 1 8 retracement line. Hence the reciprocal number that will hit the 1 .000
price projection will be a bit greater than 1 .6 1 8. This can be confirmed by
observing where the 1 .6 1 8 external retracement l ine is with respect to the
1 .000 price projection line. Everything i s as expected.

47
1'm going to show one more example of the BC external retracement, this
time going back to the AVY example. Let's look, again, at the chart from
figure 2 . 1 6. See figure 2.25.

Figure 2.25

_!'.\.T�-"'1!! ' -lob

rs1.OOO
50.155 Ret O.78G
rso.ooo

t1
Ij
[49.000

1I
)j
f4s.ooo

1J f

I1 f 1 1
:47.000
46 .340 App 1 .000
-46.000

-45.000

-44.000

21 28 0ct 12 19 26
Chart created by Dynamic Trader (c) 1996-2001

Notice the C point retracement is just about a .786, so let's try a 1 .272
external retracement of the BC leg. S ince AVY turned just a fraction shy of
the .786, I would expect the 1 .272 external retracement of the BC leg to fall
just above the 1 .000 price proj ection. See figure 2 .26.

48
Figure 2.26

?. AVY 0-0 Be F!'l

[51.000
50.155 Ret 0 .781;
[so.ooo

11
rt9.000

1I
"48.000

f
jl Ij11 1
"47.000
ilM� J.\�\:>11ro'OO
"46.000

"45.000

-44.000

21 28 0ct 12 19 26
Chart created by Dynamic Trader (c) 1996-2001

The 1 .272 external retracement of the BC leg fell just where I expected, and
confirms the completion point of the ABCD pattern quite welL This is one
of the reasons why I want a F ibonacci retracement of the AB leg, so that the
overlap will be tight at the completion point. I ' m trying to select out ABCD
patterns for trading that have a grouping of numbers close together at the
completion point.

I now want to move on and add in more criteria that I use for determining an
acceptable ABCD pattern for my own trading. At this point, though, you
might be noticing that there isn't too much more to the ABCD structure to
allow us to do any more projections or retracements. If there was a smaller
structure within the CD leg, we could use that, but in many cases there won't
be a significant enough ' substructure' to be useful.

There is one more technique that we can add in that is derived directly from
the ABCD pattern itself, but once we do that, we will have to look outside
the pattern for our additional numbers. The one remaining technique I use is
called an expansion, and it i s the least well known of the retracement, price
proj ection and expansion group of techniques. I refer the reader who is

49
unfamiliar with this technique, but who wants to know the details of its use,
to AFTC.

That book has a chapter on expansions, as well as examples throughout the

book on the use of the technique. I use the technique myself, but more as a
secondary technique. Also, I find that if the C point retracement i s at certain
Fibonacci numbers such as .3 82 or 6 1 8 and I am looking at an ABCD
. ,

where AB=CD, the expansion technique will be redundant.

I will add in one example of an expansion using the last example in the e­
mini, before moving on to finding numbers outside the ABCD pattern to
support our completion point. First, I ' ll add in j ust the expansion, so it will
be clear what I ' ve done. Then, I ' ll show the chart with the other numbers we
have built so far, too. See figure 2 .27.

Figure 2.27

60.000
55.000
50.000

Jil] � fo 1
45.000
", ,,mp 0 382
40.000
35.000

11
30.000
25.000
20.000
6t 7f FeblOm
Chart created by Dynamic Trader (c) 1996-2001

The expansion, as outlined on the chart, takes a F ibonacci ratio of the AB

leg and adds it to the top of the B point. In this case I chose a .382 ratio of
the AB leg. Knowing that the C point was a .6 1 8 pullback, and that we are

50
targeting a 1 .000 price projection, by simple subtraction I can see that the
expansion will be a .382 . This type of oversimplified calculation will not be
possible when we move on to alternate ABCD' s, and perhaps C points that
aren't right at Fibonacci retracements. I ' ll add the previous numbers back
onto the chart, so we can see where the expansion fits in. See figure 2.28.

Figure 2.28

:::'1. ES03H 1 5-1 !!S 13

!\
60.000

55.000

j�)lI
50.000

f
45,000
.� 1m kIP tUD1
40.000

\l\ltl�j }1�L
35,000

30,000
827 78' So< ""

25,000

7f FeblOm
Chart created by Dynamic Trader (c) 1996-2001

That's actually pretty impressive. The expansion fell right in between the
two previous numbers. It may be, as I said, a bit redundant, when the C point
is at a .6 1 8 Fibonacci retracement and the ABCD completes at a 1 .000 price
proj ection, but soon we will be looking at ABCD' s that are at alternate price
projections.

Sometimes, too, I find really nice looking ABCD' s that don't pull back at
the C point to a perfect Fibonacci retracement, yet the expansion technique
shows really tight overlap with the completion point. I feel it is a good
technique to know and use, if only in a secondary capacity. I will use
expansions in the examples in the following chapters, when appropriate.

51
It is now necessary to look outside the ABeD pattern itself for additional
potential support or resistance numbers that may overlap with the ABeD
completion point. Although these numbers, too, are criteria that I look for
before I consider trading the ABeD pattern, they are not criteria within the
pattern itself. They are criteria of the pattern' s placement with respect to
previous price action. These criteria all have one characteristic that groups
them together. They are all 'ABeD Points at Fibonacci Areas' .

52
 Chapter 3

ABeD Points at Fibonacci Areas

So far we have looked within the ABeD pattern itself to determine the
potential completion point, and hence the potential trade area. I have found
that the pattern is more useful for my trading if it is also filtered with some
context. I have found that I prefer to trade the ABeD pattern i f it has certain
relationships with previous price action.

For me, the 'positioning' of an ABeD pattern falls into four categories.
These categories greatly influence if, and how, I may trade the pattern. The
categories, as I see them, are as follows:

1 . ABeD' s that appear as corrections to fairly well-established trends

2 . ABeD' s that are part of the group of ' named patterns'

3. ABeD's that correlate well with F ibonacci areas, but nonetheless do

not meet the criteria to be a ' named pattern'

4. ABeD' s that, although they are very nice ABeD patterns in and of
themselves, are ' sitting out in space' , with no seeming relationship at
all with previous price action

My preference for trading the ABeD pattern leans strongly towards category
one. There is a very simple reason for this. If you reread category one you
might be able to guess it. Let me lead you a bit: . . . corrections to fairly well­
'

established trends' . This points out that the ABeD, in this context, is a
correction to a trend, a fairly well-established trend, and the assumption i s
that when the correction ends the trend will resume.

I l ike to trade with the trend. I don't l ike to try to pick tops or bottoms on my
traded timeframe. I like to get on board established trends when they
resume. I really like to trade ABeD patterns in this context. It may be my
favorite way to get into trades on these type trends. The only problem is, on
a percentage basis, this type of correction is not all that common. Hence, I
look for these setups, and usually get really excited when I see one shaping
up, but I by no means l imit my potential entries to them.

53
In my book AFTC, I develop the Fibonacci groupings technique, in the
context of entering established trends. Some of the examples have ABCD
corrections in the pullback towards the F ibonacci groupings. Although I
make use of the aspects of the pattern in that book, I do not label it as a
pattern or discuss it as such.

What I can say to the reader who has that book, or who goes out and gets it
after reading this work, is look back at the examples and look for the ABCD
patterns that also fit the techniques being taught in that book. Those are the
trades I really keep an eye out for in my own personal trading. The more you
can apply the grouping techniques in combination with the ABCD pattern,
the better the quality of the setups you will have, in my opinion. As we
progress in this chapter I will teach some of the grouping concepts from
AFTC, in combination with the ABCD pattern.

Category two ABCD' s are the ABCD ' s that make up the group of ' 5 -point
patterns' . These patterns all have really cool names, frequently named after
an animal that the pattern resembles. The idea is to start at a reference point,
usually called the X point, and then after the price moves and begins to
reverse, that reversal point then becomes the A point of an ABCD pattern.

Each pattern has very specific characteristics as to how all the points relate
to each other. The concept is that by having the various points of the ABCD
relate to each other in very specific ways, and to previous price action in
very specific ways, the reliability of the pattern is increased. I have to say
that I have seen some incredible trade examples with these specialized
ABCD patterns.

I don't prefer to trade these patterns as much as category one setups because
they are, by their very structure, reversal trades. The do attempt to pick fairly
significant reversal points. I prefer to trade in the direction of the trend, as
opposed to trying to call the end of the immediate trend. Nevertheless, this is
a fascinating area for potential study, and I do trade these category two
patterns from time to time.

Category three trades are somewhat similar to category two, but without the
specific ratios that category two requires. The concept is very simi lar, but
the main idea is to have the B and D points of the ABCD hit F ibonacci
numbers or groupings, albeit not specific F ibonacci numbers or groupings.
As long as the B and D points are in areas of potential Fibonacci support or

54
resistance, that is adequate. Sometimes the setup will actually be one of the
named patterns, but the trader would not know this unless they specifically
studied the patterns.

Not knowing the name of the pattern does not preclude one from trading it,
without even being aware it's a 'named pattern' . The main potential
disadvantage to not knowing is that ifyou felt the potential trade area was
more significant if you did have the alignments of one of those patterns, and
ifthat would influence how you made your trading decisions, then perhaps
by not knowing you would be acting in a manner different than you
otherwise would. Traders have to make that decision for themselves. For me,
I want to see and recognize any potential pattern forming that I think other
traders are watching for.

Some of the examples to follow, both in this chapter and in the remaining
chapters, will be category three ABeD's. The final category is what I call
' out in space' ABeD's. They form without any discernable relationship to
previous price action. I, personally, don't like to take trades without any
' context' . Hence, I rarely take category four ABeD's.

Keep in mind, though, there should, possibly, be exceptions to almost every

'rule', and once in awhile I find a really perfect ABeD j ust sitting out there,
and I may play it. Sometimes they appear in trading ranges or in ' chop ' , and
sometimes they can be uncanny at pointing out turning points. I only
suggest, here, that you do some experimenting and make your own decisions
on how to use this pattern, if you choose to use it at all.

Let's move on to some examples. What I plan to do i s j ust present some

ABeD' s, and then show some F ibonacci retracements and such, as they
relate to the B point of the ABeD, and as they relate to point D, the
completion point.

55
I ' ll start out with a look at the e-mini example that we have been developing,
in the I 5-minute timeframe. I ' ll pick up where we left off, with the chart
shown in figure 2.28. See figure 3 . 1 .

Figure 3 .1

?: ES03H 15·1 ' !IS £J

60,000

55,000

50,000

f
45,000

llW
40,000

35,000

_----"t=
30,000
827.73'3 Ret 0 ,1; 18

25,000

I;t 7f Feb10m
Chart created by Dynamic Trader (c) 1996-2001

The first thing that I notice on thi s chart is the two prominent highs on
February 5 and 7 . Let me point these out on the next chart to be perfectly
clear. I will add in j ust a little bit of data on the left side of the chart, to be
sure thi s is, in fact, a significant peak on February 5 . See figure 3 .2 .

56
Figure 3.2

?. ES 03H 15-1 1!8 £.i

nMl
-----
= --' 827.789 Ret 0 ,G 18

Gt 7F Feb10m
Chart created by Dynamic Trader (c) 1 996-2001

What I want to do here is see if F ibonacci retracements from both of these

two peaks (to the reversal point on February 1 0), lands on, or pretty close to,
the B and D points of this potential ABCD. I am much more interested in the
D point for this technique than I am in the B point, although a Fibonacci
overlap at the B point definitely strengthens the trade potential for me. It' s
just that the potential trade area i s at the D point, so that is the area that I
want to focus most strongly on.

One of the 'problems' that I have with thi s chart, though, before we continue
on, is that we have very little context as to where this ABCD is in the overall
picture, as well as the context of the two peaks that I am focusing on.
Although these two peaks look very pertinent when all we have to look at is
the current chart, they may or may not tum out to be significant when we see
the bigger picture.

As those that follow my style of trading know, I use three timeframes for
trading, which is a somewhat common practice. The middle timeframe i s the
traded timeframe. I use the lower timeframe for finding and implementing

57
entry techniques, and I use the larger timeframe, sometimes even multiple
larger timeframes, for overall context.

My point here is that before I begin to add in some retracements I want to

add in some more data, and see what peaks look the most i mportant in this
larger context. For this reason, I want to look at a 60-minute chart of the
mini here, before I make my final decisions on what to add. First, I will
present the chart, and then 1'11 add in some arrows and show where I see
points of interest to me. See figure 3 .3 .

Figure 3.3

::::'1. E S 03H 60-1 ' , , II!!I3 £I

Jan3 10 V 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

Now, that adds in some perspective that I wouldn't have even been able to
guess at. And where i s the potential ABeD pattern that we are looking at in
all this? It' s at the very bottom right of the chart. Look at how small it is in
the context of this 60-minute chart!

Now we can look at the two peaks that I was pointing out on the I 5-minute
chart, in this context, and evaluate them ' from thi s angle'. Let me first add in

58
two arrows showing the two peaks from the I S-minute chart, and then we' l l
discuss the peaks. See figure 3 .4.

Figure 3.4

?: ESOJH 60-( I!!I[;U3

30.000
20.000
10.000
00.000
90.000
80.000

i�
70.000
60.000
50.000
40.000

Jan3 10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

Those peaks, although very close and surely pertinent to the ABeD, are only
two of many that I would want to consider. Before I point out the other
peaks that I want to look at, let me make a point here. One might think that
the farther away from the current action you get, the less relevance the older
price action has. To that I say ' Yes, and no' . I feel it matters how significant
the previous price action actually was.

Sometimes, I believe, the older price action can have a much greater
influence (on the current price behavior) than the more recent price action.
In my opinion, an older, very significant high or low may be a much bigger
influence on the price action than a recent, although very m inor, high or low.
Hence, I very often use older, what look to me to be significant, highs and
lows, in my calculations. I ' ll add in arrows on the chart at the peaks that I
want to use in my calculations here. See figure 3 . 5 .

59
Figure 3.5

?. ES03H 60-1 !lEI £i

1 0 , 000

Jan3 10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1 996-200 1

I imagine a few readers are saying ' Well, I can see the peaks shown with all
those arrow possibly being significant, but that first peak, on January 1 0,
that's so far away, I j ust can't see that one . . . ' Well, that one is the main one
I want to look at. I have found that many, many times corrections go to the
smaller Fibonacci or F ibonacci derived retracements (keyed off of the start
of the move), as usually seen best on the larger timeframe chart.

The retracements I see this happen with the most are the . 1 86, .236 and .300.
Al l three of these numbers are derived directly from <1>, the Golden Ratio
(= 1 .6 1 8), and I use them frequently in my trading. I have seen many charts
where a pullback forms similar to the ABeD on the last chart, and I see
three noticeable peaks early in the trend. I key three retracements off these
three peaks, a . 1 86 off the top, a .236 off the next peak, and a .300 off the
next lower peak.

All three retracements hit in a very tight area (what I call a 'grouping'), and
the area sits right on the local area that I determined as the potential trade
area. And this turns out to be the turning point. I have seen this enough times
for me to want to use it in my trading. It' s my own personal opinion that if

60
these numbers had no meaning, I wouldn't see so many tight overlaps l ike I
do. Traders need to decide for themselves i f they feel that these numbers are
of any use to them in their own trading. For me, the choice is clear.

At this point, I would begin to add Fibonacci retracement numbers in and

see what ' sticks out' . For those of my readers who have read AFTC, you
know that with practice one can learn to eye the chart and pretty much make
an educated guess as to what retracements to add where. Until that skill is
developed, I teach that you can add whatever retracements seem even close
to correct, and then simply erase off the ones that fall outside of the area of
interest.

I ' ll start with a . 1 86 retracement off the top. I can see this should be close by
looking at not only the 'proportion' of the chart, but also by looking at the
high and low price and doing a 'quickie' calculation in my head. See figure
3 .6.

Figure 3.6

?: E503" 60-1 !1S t!

343.221 Ret 0 . 186

10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

61
In this case the . 1 86 retracement i s right in the area that we are looking at.
This will not always be the case. Sometimes the retracements don't line up
at all. If that is the case, it tells me that the i ssue isn't behaving
'harmonically' , and I weigh that into my trading plan.

Let's move down to the next peak on January 23, and add in a few
retracements. My guess would be a .300 retracement, but let's assume your
eye i sn't trained that well yet. I ' ll add in the .300 and the retracements on
both sides of that, the .236 and the .382 . See figure 3 .7 .

Figure 3.7

::''1. ES03" 60-" !IS EJ

30.000
20.000
10.000
00.000
90.000
80.000
70.000
60.000
50.000
838 . 180 Ret 0 .23& 40,000
30,000

10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

It is pretty clear that the .236 and the . 3 82 are out of the ' area of interest' ,
but i t was good to put them o n for the example, and then just delete off what
we don't need. I ' ll remove them so that we can see what we have so far. See
figure 3 . 8 .

62
Figure 3.8

?. ES03H 60-1 eEU!J

10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

Let's move down to the next peak on January 29, which is the most
significant peak, in my opinion, of the group of three peaks in that general
area. I feel it is the most significant because it was the high peak. The other
two peaks could be thought of as ' failed tests' of thi s peak, or lower highs
within congestion. That' s not to say we that won't use them; it' s j ust that I
weigh the January 29 peak as the most important of the three.

I would guess the retracement is a .447 retracement (a number that I have

popularized in AFTC, it' s the reciprocal of the fairly well know 2.236
external retracement). If you aren't sure, you might add in the .382, the
.447,and the .486 (another number that I developed in the AFTC). I ' ll add
those three, and we' ll see what we want to keep. See figure 3 .9.

63
Figure 3.9

?: ES03H GO-f !IS £J

30,000
20,000
10,000
00,000
90,000
80,000
70,000

10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

The .447 retracement is the correct one. The other two retracements landed
above and below the area. I ' ll delete those off, and we' l l take another look.
See figure 3 . 1 0.

64
Figure 3. 1 0

?: ES03H 60-1 !lEI a

30.000
20.000
10.000
00.000
90.000
80.000
70.000
60.000
50.000
40.000
30.000

10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

So far this is a very nice, tight grouping that is forming, right in the area we
are already looking at. I have three more peaks that I can use at this point.
Let's go to the next peak on February 3 . Since this peak is lower than the
previous peak that we j ust used, the retracement, if it i s to land in the
grouping, must be a larger retracement. Hence, I will try the .486
retracement for this peak. See figure 3 . 1 1 .

65
Figure 3.11

?: ES03H GO-I I!liU!I

30.000
20.000
10.000
00.000
90.000
80.000
70.000
60.000
50.000
40.000
30.000
10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

Well, I can assure you the retracement is in there, you j ust can't see it. This
is the kind of reinforcement that I like to see. These previous peaks, in my
opinion, have a lot to do with current price action.

Let's move on to the next peak, from February 5 . This one is interesting,
because we know that with the peak being lower we need a higher
retracement number than the .486, but the next number up is the .6 1 8. My
eye can see that the .6 1 8 is too large. Although there is a 'tertiary' Fibonacci
number between these two, I feel that the 'tertiary' numbers have little
significance in trading, and hence I won't consider using them here.

I will put the .486 and .6 1 8 on the chart, but I can tell you right now we are
going to wind up deleting them off. When you are new to building groupings
you j ust put anything close on the chart and see what fits in the groupings,
and delete off the rest. See figure 3 . 1 2 .

66
Figure 3.12

?, ES03H 60-( 1!!113 £J

10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

Just as I suspected, they fal l outside of the area, To me, this simply means
that, if this potential trade area turns out to be a significant reversal point, the
price action from this last peak didn't play that heavily in the reversaL I ' ll
delete off the retracements from this peak, but let me save a step here.

We have one more peak left, the one from February 7. This is a 'textbook'
example of an ,886 retracement. The .886 is a retracement that I discovered
(I showed the derivation in AFTC), and it is perhaps my single best trading
tool at this point. I ' ll add the .886 retracement in at the same time that I
remove the retracements we don't need from the previous peak. See figure
3.13.

67
Figure 3.13

?. ES03H GO-I I!I[;] E'J

30,000
20,000
10,000
00,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000

10 17 24 31 Feb7
Chart created by Dynamic Trader (c) 1996-2001

The .886 retracement fell right into the grouping. Now, if I was looking for a
pullback trade on this timeframe, I would be pretty satisfied, so far, with this
grouping. Perhaps I would be dropping down to a lower timeframe to look
for an entry, and also to see if I can find any more additional confirmation of
the potential trade area from the structure of the lower timeframe swings, as
the mini heads into the area.

But we were originally looking at the ABCD down on the 1 5-minute chart
already. So, what does this additional grouping data look like, on the 1 5-
minute chart, with the data we j ust put together from the ABCD itself? Let
me go back to the 1 5-m inute chart, and I ' ll add in all the retracements we
j ust did on the 60-minute. First, let' s look again at the chart from figure 3 .2,
to see where we were at, to refresh our memories. See figure 3 . 1 4.

68
Figure 3.14

?. [SOlH 15-1 R!8 £J

� '27.'" '" 0 -' 18

Gt 7f FeblOm
Chart created by Dynamic Trader (c) 1996-2001

This is the grouping that we created from data contained within the ABCD
itself. I ' ll now add the data that we just derived from the price action outside
of the ABCD. Get ready for a surprise. See figure 3 . 1 5 .

69
Figure 3.15

60.000

55.000

50.000

45.000

40.000

Eot 7f Febl0m
Chart created by Dynamic Trader (c) 1996-2001

Wow! The groupings overlap very strongly. We now have a grouping that
we derived directly from the ABeD pattern, and a grouping that we derived
completely independently of the ABeD pattern, and these two groupings hit
right at the same area. This is what I look for in my trading. Here we have a
pattern, supported by ' outside' data. In other words, the placement of the
ABeD is such that the completion point comes at an area I already think i s a
potential trade area.

Let me show once again how this trade played out. See figure 3 . 16.

70
Figure 3.16

f<
?. [S03H 15-1 !!IS F!J
60.000

55,000

\ ....-
/ _- --
50.000

i
45,000
.
li j� ii

�\�tJ 1�y 40.000

35,000

6t 7f
\��� Feb 10m
----'=== 827,78'3 Ret 0 ,6 18

111
Chart created by Dynamic Trader (c) 1996-2001

If you remember, the mini first hit the potential trade area, pulled back, did a
'retest' of the area, and then fell off. Let' s take one last look at where it went
from here. See figure 3 . 1 7.

71
Figure 3.17

?: ES03H 15-1 1!! 8 £J

830.000
--I-.--�+iII+--:---- 827.789 Ret 0 .b 18

bt 7F Feb 10m llt 12w 13t

Chart created by Dynamic Trader (c) 1996-2001

This is an amazing example of the power of the ABCD pattern at a potential

trade area. This is a classic category one trade example. A well-established
downtrend was in place, the i ssue corrected in an ABCD pattern, and then
the trend reasserted itself. This is, perhaps, my all-time favorite type of trade
right now.

I'd l ike to present one quick aside before we move on. Remember that first
peak on the last chart? The one at the upper left with the arrow pointing to it
on figure 3 . 1 7? As we discovered on the 60-minute timeframe, this peak was
the third of three peaks that were part of an area of congestion. I noticed
something interesting about this peak, and I want to point it out. Take a look
at the retracement I 've added to the chart. See figure 3 . 1 8.

72
Figure 3.18

?: ES03H 15-1 I!!IGl l!J

----..---:<,,--- 86 1 .065 Ret 0 .886

--'===
827.78'3 Ret 0 .6 18

Feb 4t 5w 6t 7F Feb 10m 1 1t

Chart created by Dynamic Trader (c) 1996-2001

That last peak that we were looking at, marked by the arrow at the top left of
the chart, was a near perfect .886 retracement from the previous peak. I
wanted to show this as yet one more additional example of the .886 in
action, because it might be that a few people are skeptical about some of the
new F ibonacci numbers.

I can understand that, but for me, I ' ve seen too much not to use them in my
trading. Still not sure that it' s not j ust a coincidence? Let' s do the peak
before thi s one. I ' ll do the retracement of this second peak from the top of
the first peak. See figure 3 . 1 9.

73
Figure 3.19

?: E S 03H 15-1 !!Ie £J

-----:r---::--- SEA,245 Ret 0 ,886

----:r-:".-- 861 .065 Ret 0,88E.

----"= 827,789 Ret 0 ,6 18

30t 3 1F Feb3m <It Sw 6t 7F Feb 10m 1 1t

Chart created by Dynamic Trader (c) 1996-2001

Lo and behold, that peak, too, was an almost perfect .886 retracement. I see
this very frequently in areas of congestion, or areas where there are greatly
overlapping swings. As I mentioned, I feel that this retracement is the single
best tool in my arsenal at this time.

Anyone who follows the Kane Trading methodology knows that I never use
anything by itself, or without context, and hence it follows that I don't use
the .886 retracement by itself. But I sure do use it as part of my complete
and comprehensive plan. I suggest that the reader experiment with it, and see
if it has any place in his or her trading plan.

I will now move on to an example of a category three trade. This is an

ABeD pattern that forms as a ' 5-point' pattern, but doesn't fit any of the
Fibonacci ratios of the 'named patterns' . I must say, though, that people are
naming patterns for more and more of the potential combinations of
Fibonacci ratios, and at some point, perhaps, every possible combination
may have a name ! I mention this now because, as time passes, whatever
example I choose now might fit the definition of a 'named pattern ' that, as of

74
yet, doesn't exist. I don't want any of my readers saying ' Well, that' s a so
and so pattern, and he doesn't even know it! '

With that said, let's look at an example in AMD. This is an absolutely great
example for many reasons. There are several nuances, and a few really cool
' surprises' that happen as the potential trade unfolds. Let's start out with a
chart of what I was looking at, at first. See figure 3 .20.

Figure 3.20

1 jfH
?: AMD D ·D 1!13 13

lt 1 Itf l j)tf f 1
J
1

11)
7.000

l!tf1
.500

II
.000

l}) j
j
.500

II
.000

1{t{t�1111
.500

.000

3.500

20 27 Oct 11 18 25 Nov 8 15
Chart created by Dynamic Trader (c) 1996-2001

AMD is trending up and has begun to correct. The correction is taking the
form of an ABeD pattern. Let me add in the numbers generated from the
ABeD, and from the placement of the ABeD. I will do all this in one step
because, believe it or not, this ABeD pattern is not the main reason why I
chose this example. Let' s look at the chart, first, and then I ' ll explain. See
figure 3 .2 1 .

75
Figure 3.21

H j
?: AMD D -D !lEl F3

I
j tl � l t f
7.000

1 �1
' ''4 R" 0 ,"'

[l I
1
.000

ll
J
��I� .500
.
_

1j
.000

11 1{P lj 1
.500
I .000

3.500

27 Oct 11 18 25 Nov 8 15
Chart created by Dynamic Trader (c) 1996-2001

I 've labeled a potential trade area here, and it has six numbers in it, although
it' s hard to discern all of them because of the tight overlap. This is a great
potential trade in its own right. It makes a nice example for this chapter, and
it fits in well with the other examples that I 've presented so far. B ut what
happens after this trade is what is really amazing to me. I ' ll move ahead and
show how this trade played out. Look and see if you notice anything
interesting. See figure 3 .22.

76
Figure 3.22

?. AMD D -D 1!!13 E3

f-9.000

ra·ooo

7.000

ft.. 000

-5.000

"4.000

27 Oct 11 18 25 Nov 8 15 22 29
Chart created by Dynamic Trader (c) 1996-2001

I ' m hoping that by now you can see what it is that I am looking at. Once this
trade played out in a favorable way, something else started setting up. This is
extremely useful because it not only points the way to another potential
trade, but it also adds something into the mix for potential trade
management. Let me add in some more of the previous price data to add
some perspective into the picture, and we' ll assess what we have. See figure
3 .23 .

77
Figure 3.23

10.000

� .ooo

[B .ooo

7.000

'E..ooo

-5.000

-4.000

1& 23 30 Sep 13 20 27 Oct 11 18 25 Nov 8 15 22 29

Chart created by Dynamic Trader (c) 1996-2001

What we have is a larger ABeD pattern setting up, and setting up as a 5-

point pattern with respect to the down move on the left side of the chart. The
ABeD pattern that first attracted me to AMD was simply the B e leg of a
larger ABeD pattern setting up. Let me put the entire grouping of numbers I
came up with on the chart in one shot, to show the potential trade area that I
am looking at. See figure 3 .24.

78
Figure 3.24

?. AND 0-0 I!!I EH!I

10.000

1& 23 30 5ep 13 20 27 0ct 11 18 25 Nov 8 15 22

Chart created by Dynamic Trader (c) 1996-2001

This is a fairly tight grouping, considering how large of a range of data I

used to generate them. At first look, I would probably delete out the lower
.486 retracement, and the upper .3 82 retracement, and leave the remaining as
my grouping. Before I discuss the numbers, though, let me show a lot more
data on the chart, and highlight all the peaks that I used to create some of
these numbers. This wil l add in some needed perspective. See Figure 3 .25 .

79
Figure 3.25

?. AMD D-D !lEI £J

20.000

18.000

16.000

1'1.000

12.000

10.000

.000

.000

.000
Dec 02 Feb Mar Apr May Jun Jul Aug Sep 0ct l'Iov
Chart created by Dynamic Trader (c) 1996-2001

Notice how far away some of the peaks are from the potential trade area. Yet
I feel that they play a role in determining a potential trade area that I would
consider. That .382 retracement I said I might delete off? It' s the . 3 82
retracement of the entire down move off of the top.

I've found those types of retracements to be significant for my trading.

Hence, I ' ll leave it in, even if it does sit j ust above the maj ority of my
grouping. Let's zoom back in on the chart, and look at AMD just as it enters
the potential trade area. See figure 3 .26.

80
Figure 3.26

:::"!. AMD D-D 1!!18 Dl

10.000

16 23 30 Sep 13 20 27 Oct 11 18 25 Nov 8 15 22 2�

Chart created by Dynamic Trader (c) 1996-2001

AMD went up strongly into the potential trade area. It just about exploded
off of that .3 82 retracement area of the AB leg, which was the completion
point of the original ABCD that we were looking at. It has now thrown a
reversal bar, after hitting the AB=CD point just about exactly (shown as the
APP 1 .000 line on the chart).

I ' ll move quite a bit ahead in time now, to show what happened after this.
(I 'm trying to focus more holistically here on what is happening, and not on
how to generate the numbers and build the groupings. I ' m hoping that the
reader has the idea on the latter part by now.) See figure 3 .27.

81
Figure 3.27

?: AND D ·D !lEI F.3

10.000

5ep Oct Nov Dec 03 Feb

Chart created by Dynamic Trader (c) 1996-2001

This larger ABeD pattern played out beautifully. I first got interested in
AMD because of a small correction that was i n the form of an ABeD
pattern. This turned into a much larger ABeD pattern that really played out
nice. And now, I ' m hoping that all my readers are anxiously saying 'But
Jim, look at the chart ! Are you seeing that? L ook at that! ' Yes, I sure do see
it. Just in case you don't, let me highlight the chart for you. See figure 3 .28.

82
Figure 3.28

?: AMO 0 -0 I!!IEI F!I

���� I!Hl ifl�1

------- 9.785 Ret 0 .332
10.000

--t£'------=tr.-,,.--lr- S .E-S2 Ret 0 .3132

Sep Oct Nov Dec 03 Feb

Chart created by Dynamic Trader (c) 1996-2001

Nah, it couldn't be. Could that actually work out, again? You can't know for
sure ahead of time, but this is what I look for. 1 ' d set up a potential trade
area, and once the area is penetrated, 1'd dial down to a lower timeframe and
look for an entry technique (see Kane Trading on: Entry Techniques for
details on how I do that).

Let' s move on and see if this setup makes it three ABCD' s in a row. Or is it
four? Look at the BC leg of the highlighted ABCD pattern. I see an ABCD
pattern in that leg, j ust like there was one in the BC leg of the first large
ABCD pattern we looked at. What do you think? Is it going to reverse
again? See figure 3 .29.

83
Figure 3.29

?: AMD D -D 1!!13 J!1

������� I!H� i!rtl

----- 9 .785 Ret 0 .382
10.000

,
\j¥J
--It'------tr,,.-'t-_--:r�- 5.E.52 Ret 0 382

Sep Oct Nov Dec 03 Feb Mar Apr

Chart created by Dynamic Trader (c) 1996-2001

It almost doesn't seem possible. When I see things like what I 've presented
in this AMD example, I j ust can't comprehend how anyone can say that
price action is completely random and independent of all past price action. It
was just a random coincidence that AMD did four ABCD pattern reversals
in row here? And we only examined this small area of AMD history.

I can't 'prove' that price action isn't random, or 'prove' that anyone can
make money using this technique. I can only present it to my readers and let
them decide, individually, if they want to use it or not. Myself, I feel there is
an edge here, and I use it in my trading.

1 ' d like to make a few comments before we move on to the next chapter on
alternate ABCD patterns. First, I didn't focus on the Fibonacci placement of
the B point as much as I could have in the last two examples. I didn't want
to get too many ideas going at one time, possibly confusing the reader.
Nonetheless, I feel it' s an important criterion to satisfy, and I don't want to
leave the impression that I don't fully examine it. For this reason, I want to
look at this in brief before we move on. Let's look back at figure 3 . 1 , shown
again for convenience. See figure 3 .30.

84
Figure 3.30

?'. ES03H 15-1 1!13£1

f
Jf� 8".'" '0< 0 -'18

Gt 7f FeblOm
Chart created by Dynamic Trader (c) 1996-2001

This is the potential trade area created from just the data within the ABCD,
before we started to add in 'external' data from the previous swings. I didn't
even present my look at the placement of the B point, which I use to help my
decision on how much I like this particular ABCD pattern. Let me add that
to the chart, and see what that tells us. See figure 3 .3 1 .

85
Figure 3.31

?. E S 03H 1 5-1 I!EU.3

hi! '�UI' Aoo> !Im

11
E.t 7F FeblOm
Chart created by Dynamic Trader (c) 1996-2001

The B point was a near perfect .6 1 8 retracement off that peak from February
7. Let me point out, then, that this also forms a 5-point pattern with the X
point at that very same February 7 peak. I ' ll get back to this with my second
point, in a minute. F irst, let me add in a . 3 82 retracement from that peak on
February 5 , as seen in the upper left hand comer of the chart. See figure
3 .32.

86
Figure 3.32

::.-:: [S03H 1 5-1 !I[;J f!1

60.000
55.000

�
50,000
45.000
� m ��
40.000

35.000

11
30.000
25.000
20.000
6t 7f FeblOm
Chart created by Dynamic Trader (c) 1996-2001

So, it turns out that the . 3 82 retracement from the February 5 peak (in the
upper left hand corner of the chart) falls just about on the .6 1 8 retracement
from the peak on F ebruary 7. And some say this is all random! The B point
is in a very 'harmonic' area, and fully meets my criteria in this regard.

To lead into my second point, let me remove the price labels from the chart,
and highlight what I mean when I say ' 5-point' pattern. I ' m assuming my
readers are all familiar with this pattern, but perhaps that's an assumption I
shouldn't be making. See figure 3 .3 3 .

87
Figure 3.33

?:. E S 03H 1 5-1 1I!!8 £I

x

A
7f FeblOm l lt
Chart created by Dynamic Trader (c) 1996-2001

The ' 5-point' pattern is an ABCD pattern, within the context of a previous
trend that starts at a point labeled X. The completion point of the ABCD
pattern may or may not exceed the starting point at X, depending on the
variation of the pattern. I ' m not going to define the ' 5-point' patterns any
further than this, since it would be outside the scope of this book, but I did
want to visually show the reader what they looked like. Let me show, again,
how the mini reacted off of the pattern. See figure 3 .34.

88
Figure 3.34

?. E 5 03H 1 5-1 1!!8 t1

X
D

\It
45.000

40.000

35.000

�l��Vlt
�1 15.000

10.000

7f Febl0m 1 1t 12w 13t

Chart created by Dynamic Trader (c) 1996-2001

This particular pattern isn't one of the 'named patterns' because the
Fibonacci ratios don't meet the criteria of any of the patterns (yet!). That
doesn't mean, for my trading, that the pattern isn't useful to me, though.

Let me get on to my second point. Let's see what happens to our perspective
when we add a lot of previous data to the chart. See figure 3 .3 5 .

89
Figure 3.35

?. E S 03H 60-1 1!!I13 £J

30.000
20.000
10.000
00.000
90.000
80.000
70.000
60.000
50.000
40.000
30.000
20.000
10.000
15w lbt 17f Jan 22w 23t 24f Jan 28t 29w 30t 3 1f Feb 4t 5w bt 7f Feb l lt 12w 13t
Chart created by D�/namic Trader (c) 1996-2001

What you see now is a long, fairly strong downtrend, with the 5-point
pattern j ust a small part of the overall trend. What I originally saw was an
ABeD correction to a trend, a category one trade, one of my favorite kinds
of trades. It only becomes a 5-point pattern when you look at it close up, on
a smaller timeframe.

My point is, many times an ABeD pattern wi ll be both a category one and a
category two or three setup, depending on the timeframe that you look at the
setup in. Most of the times that I see 5-point patterns presented in books or
on websites, they are presented either as a stand-alone pattern, or at the end
of a trend, but setup to reverse the trend. The X point or the completion point
of the pattern is at the end of the trend. This sets up a reversal of what is,
perhaps, a maj or trend.

The way I have the 5-point pattern shown in the last chart, it' s a continuation
pattern. I don't like to try to pick the ends of long trends. So my point is, I
categorize the type of ABeD based on the larger timeframe. Although this
last chart example is certainly a textbook 5-point pattern, it' s also, more
importantly, an ABeD correction to a very long-standing trend. Always

90
know and understand the context of what you are looking at as a potential
trade area, in the context of the traded timeframe.

In the next chapter we are going to look at ABCD's where the length of the
AB and the CD legs are not equal, as has been the case in all the examples
so far. This doesn't, however, have a material effect on how we develop the
potential trade areas. In fact, the procedure will be essentially identical. And
it will open up a much larger pool of potential trades.

91
 Chapter 4

Alternate ABeD Patterns

One of the most interesting things that I noticed when I started studying
ABCD patterns was that many very good looking and tradable patterns were
falling just short of, or going j ust long of, the point where AB=CD. I started
wondering if there was any reason why I should only consider patterns
where the AB leg was equal to the CD leg, and I couldn't think of any good
reason to limit myself like that. If nothing more, I wanted to at least study
patterns where ABi=CD, and see what I might discover.

What I discovered was that not only was there a huge number of successful
ABCD patterns where ABi=CD, I found that, in the studies that I did, they
outnumbered the patterns where AB=CD. This only makes sense, since there
are many possible ways to form patterns where ABi=CD, and just one
possible way where AB=CD. This told me that I definitely wanted to
consider these additional ABCD patterns in my trading, where ABi=CD.
These variations are called 'alternate' ABCD patterns.

I did not discover or invent the concept of alternate ABCD ' s, I just put my
own spin on some variations. I first came across the concept of alternate
ABCD' s in discussions with Scott Carney over at Harmonic Trader. Scott
presents this alternate concept in his material in reference to ABCD' s where
the CD leg is either a 1 .272 or 1 .6 1 8 multiple of the AB leg, or the reciprocal
multiples, .6 1 8 and . 786. In my presentation here I will use the . 786 and
1 .272 multiples of the AB leg, but I will also use two other multiples that
I 've never seen used before.

That is not to say that these two particular multiples have not been presented
elsewhere, it' s just that I don't recall ever having seen them presented
anywhere else. And since the two variations key off of the .886 retracement
(and its reciprocal) that I developed, it' s unlikely that those two variations
have been considered before my work. Again, I refer the reader to my book
AFTC for the full derivation of these numbers.

My reasoning on the merits of alternate ABCD patterns is as follows. I feel

that if there is merit in the l .272 alternate price proj ection, it should follow
that there would also be merit in its reciprocal, the . 786. I have found no

93
reason to prefer ABCD patterns where the CD legs are equal to or greater
than a l .000 ratio of the AB legs. And i f the .786 is valid in my eyes, then
the .886 should be, too, especially i f I feel that the .886 retracement is,
perhaps, the best tool in my trading arsenal right now.

It would then follow that the reciprocal of the .886, which is the l . 1 3 , would
also be useful. (Detailed derivations and uses of the l. 1 3 , as well as the .886,
are available in AFTC, for those readers that want more information on these
new numbers.) Hence, these are the five numbers that I use for price
projections: the .786, .886, l .000, l . 1 3 , and l .272.

It is easy to put those five price projections on the chart in one shot with
specialized software, but they are reasonably easy to hand calculate
(although it' s time consuming), if you want to just do it that way. I prefer to
make it easy on myself and use software, but it i sn't critical to the process.
At this point I want to note, there is nothing different about the development
of potential trade areas for this technique except the use of alternate ABCD
proj ections in the calculations, and the fact that now there may be jive areas
that we need to look at instead of just one.

If you've read AFTC and are fami liar with the groupings technique, you will
understand that you may form several tight groupings in a particular area.
After that, you watch how the i ssue behaves as it enters the area of the
groupings, and then move to the entry technique phase of the trade. So now,
instead of just one grouping in the potential trade area, we may have more
than one, set very closely together.

As you will see, though, other than having more than one grouping, the
process is pretty much the same. Hence, once I have demonstrated the new
aspects of the building process, I will not focus as much after that on
creating the groupings, I will j ust present various examples so the overall
picture can be studied.

94
Let me start with an example in CIEN. See figure 4. 1 .

Figure 4.1

?: elEN 0-0 B8 £J

75.000

70.000

26 Jun 9 16 23 30 Jul 14 21 28
Chart created by Dynamic Trader (c) 1996-2001

Here I see CIEN in an uptrend, and starting to correct. The correction is

coming in the form of an ABCD. This is forming a potential category one
trade, and possibly a category three at the same time, with respect to that low
on May 24. Just before the point that this chart was captured I normally
would begin creating my potential trade area.

I ' l l back up the chart up one bar and put on the 1 .000 price projection, a
1.6 1 8 BC leg external retracement, and a .3 82 expansion from within the
potential ABCD pattern, as wel l as .486 and . 786 retracements off the May
24 bottom and the June 8 pullback, respectively. There may be other
relevant numbers, but I don't need any more at this point. I have an
excellent, tight grouping to work with. See figure 4.2.

95
Figure 4.2

?. CIE N D-O 1!! r:;J F!'I

75.000

70.000

2& Jun 9 16 23 30 Jul 14 21

Chart created by Dynamic Trader (c) 1996-2001

Now, I wait as CIEN approaches the potential trade area. If you have a good
eye and you look back at figure 4. 1 , you can guess what i s going to happen.
Something happens that didn't happen in any of the previous examples.
Let's move back to where we were in figure 4. 1 , which is j ust one more bar
ahead, but this time with the potential trade area labeled on the chart. See
figure 4.3 .

96
Figure 4.3

)lj
?. elEN D-D 11!!18 E'J

t
td 1 d r i f t
75,000

)t
70,000

26 Jun 9 16 23 30 Jul 14 21 2:
Chart created by Dynamic Trader (c) 1 996-2001

That is a clear blowout of the potential trade area. Fortunately, I wouldn't

have gotten an entry signal for this trade on the lower timeframe using the
entry techniques that I use, as outlined in Kane Trading on: Entry
Techniques. This amounts to just watching this one go by. This will happen
on a certain amount of trades, they j ust don't respond to the potential trade
area. That's trading. At least waiting for a confirmation entry technique will
keep you out of some of those 'blow out the zone' trades.

All is not lost here, though. Let me add in a 1 .272 price proj ection of the AB
leg, which will show up j ust below the current potential trade area. See
figure 4.4.

97
Figure 4.4

?. elEN D·D I!!I(;I £J

75.000

70.000

-- &4.375 App 1 .272

2& Jun 9 1& 23 30 Jul 14 21 2:

Chart created by Dynamic Trader (c) 1996-2001

This 1 .272 alternate ABCD completes at a price j ust under where C I EN

currently is trading on this chart. Since I pretty much never trade j ust ' one
number' , I would now create a grouping in this area, to confirm that there is
additional Fibonacci support to complement this area. If I am unable to find
such additional support, I simply pass on the trade and move on. In this case,
I am able to find the numbers to satisfy my own needs. I will add them onto
the chart in one shot. I followed the same procedure that I have followed in
creating the other examples so far. See figure 4 . 5 .

98
Figure 4.5

?. elEN 0-0 !!IS EJ

75,000

70,000

26 Jun '3 16 23 30 Jul 14 21 2:

Chart created by Dynamic Trader (c) 1996-2001

We now have another grouping to watch. I will just move ahead and show
what happened, in two steps. See figure 4.6.

99
Figure 4.6

0.000

5.000
0.000
75.000

iU�t ��
70.000

B�;iff ��� 5.000

0.000
5.000
0.000
5.000
2& Jun 9 if> 23 30 Jul 14 21 28
Chart created by Dynamic Trader (c) 1996-2001

CIEN bounced just about three cents above the top of the grouping, but since
the grouping wasn't penetrated, I would not have been ready to accept an
entry trigger on the lower timeframe. CIEN then came back down and
penetrated the grouping in textbook fashion.

It is at this point that I would now determine my entry trigger and accept it,
if all played out as expected (I sometimes abort trades if the price action gets
'unusual' in the potential trade area, so I don't want to imply that my trading
is always so ' cut and dried' , devoid of subj ective decision making, as far as
the entry trigger acceptance goes). Let's see how this 1 .272 ABCD worked
out, after CIEN blew out the AB=CD pattern variation. See figure 4.7.

1 00
Figure 4.7

?. CIEN D-D !IS F3

1 10,000

100,000

========t$=i$==� �iji�� �� 70,000

--- ....-...
.. -----
- '4 ,m �MU:

26 Jun '3 16 23 30 Jui 14 21 28 Aug 11 18 25 !:

Chart created by Dynamic Trader (c) 1996-2001

CIEN j ust smoked up after the 1 .272 alternate ABCD pattern completed.
There was a near 80% run up of over $50, j ust about ' straight up' , as they
say. CIEN continued on up to $ 1 5 1 before finally reversing significantly.
Now, I will in no way say that this alternate ABCD pattern ' compelled'
CIEN to go up, or that the pattern had anything whatsoever to do with CIEN
going up. As they say, there is only one thing that makes a stock go up, and
that's buying.

Patterns don't make stocks, or any other trading vehicles, go up. B ut what I
feel that they do is point to areas where buyers (or sellers) may come in. The
techniques point me to areas where something might happen, areas that
potentially give me an edge. I can't 'prove' that any of the techniques give
me any edge at all , but I truly feel that they do, or I wouldn't trade using
them.

How many times can I see things like this example in CIEN, and say that it' s
all just random? Besides, there is nothing random about steady accumulation
by big players, for example. The market is not filled with players who just
wake up, go to the office, flip a coin and buy if it's heads or sell if it' s tails.

101
They are doing very specific things to meet very specific agendas, and that's
not random. That's why a recent study done by MIT researchers showed that
some setups and patterns do, in fact, produce a non-random edge.

I say all this here because there are stil l people who figure that because one
can't mathematically 'prove' , according to rigorous academic standards, that
a setup produces an edge, therefore the edge doesn't exist. I say it very well
may exist, it is just not rigorously and mathematically proven. Traders take a
lot of heat from the 'random-walkers ', and I just want to make it clear that I ,
personally, cannot believe that all the examples I can find are just random
occurrences. Hopefully, the MIT studies will finally put to rest the 'random­
walkers' .

At this point 1 ' d like to show another example of an alternate ABCD pattern,
and then I ' ll move on to how I actually make decisions using what might
seem l ike an overwhelming five proj ections, instead of just one. Let's look
at C, as a potential ABCD pattern shapes up. See figure 4.8.

Figure 4.8

_...111

[42 , 000

[40 , 000
23 30 Apr 12 20 27 May 11 1S 25 Jun S 15 22 29 Jul 13 20 27
Chart created by Dynamic Trader (c) 1 996-2001

1 02
There are a few ways to look at the position of C in this chart. Some might
say that C is in a large trading range that started back in early April . That is
an interpretation that I wouldn 't disagree with. But recall how I said that I
frequently see very nice, tradable ABCD patterns appear in areas of
congestion or in trading ranges. So, the fact that C is in a range won't
preclude me from considering potential ABCD pattern trades.

That's not, however, what attracted me to this potential ABCD pattern. I

noticed that C had run up a bit from the low on Mar 22. As it struggled to
move higher, it did a small ' double top' of sorts on May 24 and June 5 , and
then sold off fairly sharply. It then recovered from this sell off and set a
nominal new high for the move. Shortly after this, it formed another double
top, and sold off even more sharp ly. It was at this point that it started to form
a potential ABCD pattern.

This looked like a place where C might fail and start to sell off again. I had
no idea if C would set a nominal new low or really sell off, or if C would
even reverse at all at the potential ABCD pattern completion point. What I
did know is that I wanted to see what type of groupings I could build around
this pattern, and how C would react to them.

The first step is to see how the C point (the end of the BC leg, not the ticker
symbol C) looks, as far as whether it reversed at or near a F ibonacci number.
I can see quite clearly what retracement that is, so I ' ll just add that one. See
if you can make an educated guess as to which retracement it is. In reality,
when you are new to this, you will likely add in all the retracements that
make sense, and see if the issue reverses at any of the retracements that you
added. See figure 4.9.

1 03
Figure 4.9

l�Jll
..:.lolxi

ll� jt)
[-54.000

fs2.000

U�
fso.ooo

-48.000

Jl�tj 1 ) -46.000

I !1
f44.000

1
f42.000

f40.000

23 30 Apr 12 20 27 May 1 1 18 25 Jun 8 15 22 29 Jul 13 20 27

Chart created by Dynamic Trader (c) 1996-2001

The C point reversed very close to a .6 1 8 retracement. Recall that I prefer C

point retracements at or near a .6 1 8, with a preferred range of from j ust
under .500 up to .6 1 8. I stil l trade outside that range of C point retracements,
but I like setups in that range the best. Since C (the stock) is showing a really
nice C point retracement, I move on to the next step.

In this example, I ' m going to j ust start with the . 786 alternate ABCD
projection. I am going to do this for a few reasons. This will be the first
projection that the price would meet if C continues up. To make the example
easy to follow, I want to construct a small grouping in this area, and see how
C behaves as it hits this area. If C continues through this area, I will
construct the next grouping up, and we will see what happens there.

In my trading, I usually have multiple groupings in a broad area, and I then

watch how the issue behaves as it hits the groupings. I frequently dial down
to a lower timeframe once the first grouping is penetrated, and then look for
an entry trigger. Depending on where I set my stop, I may take some 'heat'
if the issue starts in my favor, then reverses and heads for the next grouping.

1 04
Sometimes thi s leads to a stop out, and shortly after that the issue gives
another entry trigger off of the next grouping. It' s not uncommon, if you use
a very fine entry trigger and keep the stop tight, for it to take one or two
extra 'tries' to catch the move. If the groupings are fairly tight together,
sometimes a prudent stop can be set just outside the farthest grouping. That
would allow the trader to sit through multiple bounces on the inner area of
the groupings.

My point is, in this example I will add further groupings as needed, but in
my own trading I will have all these groupings pre-constructed and on the
chart before the entry trigger phase is even begun. Sometimes it is confusing
to beginners to see all the groupings at once, so for clarity in this example, I
will add them as needed.

I'll add the .786 price proj ection onto the chart, and for clarity I ' ll show the
'zigzag' that we are looking at. See figure 4. 1 0.

Figure 4.10

j j 3.000

1j
2.000
5 1.458 App 0 .78&
1 .000

tj
0.000

9.000
4'3.713 Ret 0 .E.1S
8.000

22 29 Jul 13 20 27
Chart created by Dynamic Trader (c) 1996-2001

1 05
The next step for me would be to add in a few more numbers to see if there
is additional confirmation for this area where the . 786 price projection falls.
Keep in mind, we are looking to develop potential areas, and not exact
prices. That's why I chose to call them areas. I am looking for areas, albeit
fairly tight areas, where I might consider a trade. Don't expect every line to
fall exactly on top of the other lines. It happens sometime, but it is not
necessary. My goal is to find a small zone that has multiple numbers in it.

I'll add in the Be leg external retracement next. Given that we are looking at
a smaller price projection than a 1 .000, and that this projection is falling just
above the B point, I would first try the 1 . 1 3 external retracement. See figure
4. 1 1 .

Figure 4.11

j
j 1j �Hl� ��Nb�&
1 . 000

-----l---"tt==== 4'3 .7 13 Ret O . E. le

22 Jul 13 20 27
Chart created by Dynamic Trader (c) 1996-2001

The 1 . 1 3 external retracement was the correct choice, falling quite close to
the .786 price proj ection. Next, I will add in an internal retracement off of
the high on Jun 22. I can see that this starting grouping we are working on is
going to fall close to a .6 1 8 retracement from that high peak, so I ' l l add that
in next. See figure 4. 1 2.

1 06
Figure 4.12

?: C 0 -0 I!!I GU!'I

1 t jj
---4�==== 48 .7 13 Ret O.� 18

22 2� Jul 13 20 27
Chart created by Dynamic Trader (c) 1 996-2001

That's a nice, tight grouping so far. I ' m going to add in one more number,
which is a real 'tertiary' number, and I ' ll use a ' secondary' technique, the
expansion technique. You might ask why I would even bother to do this. In
fact, I don't feel, at this point, that I need to do any more. But I like to see i f
this technique adds a number to this tight area, even ifjust for curiosity's
sake, and for fun. I actually find experimenting around with these numbers
fun. I ' ll add in a . 1 46 expansion to the grouping. The . 1 46 can actually be
derived directly from <1>, the Golden Ratio (= 1 .6 1 8), if any readers were
wondering about that. See figure 4. 1 3 .

1 07
Figure 4.13

)
?. C D -D !lEU:!

j
1t
--�====== 43.713 Ret 0.c18

22 29 Jul 13 20 27
Chart created by Dynamic Trader (c) 1996-2001

The . 1 46 expansion fell just over eight cents above the . 786 price projection.
How's that for close? I now have a grouping that I would look to trade
against. At this point I would drop down to a lower timeframe and observe
how C behaves in this area, as I watch for an entry trigger. Let's add a few
bars in, and see what C is doing with respect to this area. See figure 4. 1 4.

1 08
Figure 4.14

t t

t 1)If11
d ) 1j
---'+1[:==== 48 .713 Ret 0 .6 13

22 29 � 13 � II A�
Chart created by Dynamic Trader (c) 1996-2001

C is reversing right at this grouping. In fact, the high price into the grouping
was within less than two cents of that .786 price proj ection. Let's see how
the trade played out longer term. See figure 4. 1 5 .

1 09
Figure 4.15

?. C 0 -0 !IS a

-�==���==;==t';I=== 4$ .713 Ret O . €' lS

38.000
36.000

22 29 Jul 13 20 27 Aug 10 17 24 31 Sep 2

Chart created by Dynamic Trader (c) 1996-2001

The .786 alternate ABCD sure did point to an area where something was
about to happen. If one were waiting for the 1 .000 ' standard' ABCD to be
hit, the trade would have been missed, as C never got to that point. This is
why I like to be aware of where the alternate ABCD' s fall, so I can watch
those areas and make a decision i f I want to take a trade there.

This gives me additional potential opportunities that I might otherwise miss.

The same idea holds for ABCD's over the 1 .000 price proj ection. If I gave
up on a potential ABCD trade because the 1 .000 price projection was
exceeded, I may cut out a lot of very good potential alternate 1 . 1 3 and 1.272
ABCD trades.

Let's move on to how I set up pretty much all of my potential ABCD pattern
trades. Once I determine that I like the basic structure of the pattern as it
begins to set up, I check the C point retracement. If I still like what I see, I
begin construction of some groupings.

S ince I can't know which alternate ABCD may reverse the i ssue, if any, I
put all five of the price proj ection possibilities I work with on the chart at

1 10
one time (.786, .886, 1 .000, 1 . 1 3 , and 1 .272). I follow this up with three
external retracements of the Be leg, the 1 . 1 3 , 1 .272, and 1 .6 1 8. I will then
look at some expansions and see if they complement what is forming at that
point.

As I 've mentioned already, expansions are a secondary technique, but one

which I like to experiment with. I pretty much add expansions onto all of my
charts, but I weigh them less heavily than the other techniques. If they don't
line up well with the numbers already on the chart (they usually do line up
quite well, in my experience), I simply don't use them.

At this point I add in internal retracements from previous price action. These
are the numbers that are generated from data outside of the ABeD pattern. I
also look for any other significant swings that I could use with the same
techniques we have been looking at. Sometimes there is a swing within a
leg, or something of that nature, that can also contribute to the groupings. I
then look to see what, if anything, is lining up.

I ' m looking to not only reinforce the completion point of the ABeD, but
also the B point of the pattern. Keep in mind, too, that I ' m trying to find
areas. This means that, for all intents and purposes, I don't look at the five
price projections as five potential areas, I look at them as possible lines for
defining areas.

Let me explain my thinking here. If the area between the l . 1 3 and l .272
price proj ection, for example, had a .large group of numbers fall in between
them, and very little number grouping elsewhere, I would define my area as
the area between these two proj ections, including all the numbers grouping
within the area.

I would not try to find, or ' force' , two areas, one based on each projection.
I ' m putting numbers on the chart that I feel could potentially be significant,
and looking to see what areas 'jump out' by forming tight groupings. I then
remove the lone numbers, and look to trade against the remaining groupings.

111
Although what I 've just outlined is, for the most part, a reiteration of the
process that I have followed to get us to this point, perhaps the procedure I
follow isn't quite as clear to the less experienced readers as I think it is.
Before I move on, then, and show an example following this process, let me
summarize the steps that I follow, one more time:

1 . I evaluate the potential ABCD pattern as it shapes up, and decide i f it

meets my criteria for a potential ABCD pattern trade. I look for
proportion and placement in this step. I determine which category the
pattern will fall in.

2. I check the C point retracement and make sure it meets my criteria. I

prefer a .6 1 8 retracement, but I sometimes accept them as shallow as
. 3 82 or as deep as .886. My main concern i s how close the
retracement is to a F ibonacci number.

3 . I add in the five price proj ections (.786, .886, 1 .000, 1 . 1 3 , and 1 .272).

4. I add in the 1 . 1 3 , 1 .272, and 1 .6 1 8 external retracements of the BC

leg.

5. I add in any expansions I find that fit the groupings so far, but I keep
these as secondary numbers in my m ind.

6. I add in internal retracements from previous price data that is outside

of the ABCD pattern itself. I look for these to not only reinforce the
groupings at the completion point of the ABCD, but also for them to
reinforce the B point of the ABCD.

7. I look for any swings that I feel m ight be useful, but which haven't
been utilized in any of the calculations so far.

8. I delete off any numbers that don't fit into obvious groupings.

This is quite a list, and perhaps a lot more than some readers signed on for.
Understand, you can elect, if it fits your trading plan, to just trade the 1 .000
ABCD patterns, and ignore all this additional material. This is a much more
advanced technique, and requires a lot more legwork to determine the
potential trade areas.

1 12
I pursue it because I not only feel it provides some great potential trading
opportunities, but also because I feel the additional work, once the
techniques are learned, is well worth it. If you are satisfied with just looking
for potential trades only where AB=CD, there is absolutely nothing wrong
with that. And for those who want more, I have included this additional
information.

Let's finish thi s chapter with an example in the NDX. I particularly chose
thi s example because it isn't 'textbook' . It is very much like many of the
examples that I find when attempting to trade not only the ABCD pattern,
but also grouping techniques in general. I think it points out a very important
aspect about these techniques, and that is: don't get too caught up in the
specific action such that you lose the holistic perspective.

Here's what I mean by that. Just because we have several nice groupings
doesn't mean the issue will reverse, to the penny, on any one of them. Let' s
say, for example, you have three nice, tight groupings, and they are sitting
very close together. Now, say the issue goes through the first grouping, and
through the second grouping, and then reverses before hitting the third
grouping. It then rockets off, making for a great potential trade.

If you go in and say ' Well, it didn't tum on even one single number I had
laid out! ' you'll be m issing the point. I look for areas where I think
something may happen. I think of these areas as ' statistical ' areas, in that
each individual number, in and of itself, contributes to what I feel is a
statistically significant area. Once I have that area laid out, the individual
numbers aren't that important anymore. And i f I have three tight groupings,
for example, in a small overall area, the potential trade area is, really, the
whole area made up of the groupings.

If the issue turns right between groupings, some of which are, at times,
separated by mere pennies, that doesn't make the trade any less likely to be a
winner, in my experience. The most important thing is, is the pattern there,
and is the pattern pointing to a somewhat specific area, where a lower
timeframe entry trigger can then prompt you into a trade? I ' m suggesting
that you don't lose sight of the bigger p icture, and that is that the 'two-step'
pattern can be a powerful tool to point a trader to potential trade areas.

1 13
With that said, let's do a step-by-step procedure on the NDX. Let's start with
a chart showing a strong run up in the index, and what looks l ike an ABCD
correction unfolding. This is setting up as my favorite type of ABCD, the
category one type, correction to an existing trend. See figure 4. 1 6.

Figure 4.16

� N OKX 0-0 if 1!! 9i £J

1300.00

1250.00

1200.00

1 150.00

1 100.00

1050.00

1000.00

50.00
Mar Apr May Jun Jul Au
Chart created by Dynamic Trader (c) 1996-2001

The correction that is taking place on the far right side of the chart has taken
out the previous swing-low point, and is shaping up to be the largest
correction so far in this uptrend. Corrections that set up like this, in my
experience, frequently play out as category one ABCD's. Let's look at a
close-up of the potential ABCD pattern. See figure 4. 1 7.

1 14
Figure 4.17

?: NDX.X D-D !l13 £I

1310.00

1j
1300.00

1
1290.00

I t
1280.00
1270.00
1260.00
1250.00
1240. 00

1Ij
1230.00
1220.00
1210.00
1200.00
1 190.00
1 180.00
27 Jul 11 18 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

So far, I like the positioning of the potential ABCD. When looking at the
close-up, I see that this pattern, if it plays out, wil l also likely be a category
two or three pattern, a 5-point pattern. Recall that I pointed out how many of
the category one setups also fit into category two or three when viewed in a
lower timeframe, or when viewed close-up.

Let's move on to the next step, checking the C point retracement. This looks
like a .786 retracement, so that is what I ' ll put on the chart. If your eye
doesn't see it as a .786, put on the .6 1 8, .786, and .886, and see what that
shows you. See figure 4. 1 8.

1 15
Figure 4.18

?: N OX.X 0-0 !l8 D]

1310.00
1298.39 Ret 0 .786 1300.00
1290.00
1280.00
1270.00
1260.00
1250.00
1240.00

tj
1230.00
1220.00
1210.00
1200.00
1 1 90.00
1 1 80.00
27 Jul 11 13 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

The NDX reversed at an almost perfect . 786 retracement at the C point. See
if you notice anything else interesting about the run up to the C point, which
is actually the BC leg of the potential ABCD. If you don't see it, let me point
it out to you. The BC leg has an ABCD pattern in it. You would have to
drop down to a lower timeframe to really see the detail of it, but it' s there,
and it was a pretty decent pattern in its own right.

The NDX reversed within less than a point and a half of the 1 . 1 3 ABCD
completion point (in this BC leg ABCD pattern). Not bad, for a volatile
index with a value of almost thi rt een hundred at the time. As an aside, let me
show the chart with this 1 . 1 3 price proj ection on it. Not only does it support
the C point, it shows that, once again, the BC leg of an ABCD itself contains
an ABCD that I find tradable. See figure 4. 1 9.

1 16
Figure 4.19

?: NDKX D-D I!IGI F.3

1310,00
i��ij :g� �ol:;ohl9 1300,00
1290,00
1280,00
1270,00

j1
1260,00
1250,00
1240,00

Ij
1230,00
1220,00
1210,00
1200,00
1 190,00
1 180,00
27 Jul 11 18 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

If you dial this one down to the 60-minute time frame, you will find that this
was an excellent alternate ABCD pattern, and, depending on how strict one
is with their definition, was also a ' named pattern' on that timeframe. I ' ll
remove that 1 . 1 3 price proj ection from the BC leg, and we' l l get back to the
main example.

At this point, I will add in all five of my price projections, the . 786, .886,
1 .000, 1 . 1 3 , and 1 .272, all in one shot. They will cover a pretty broad area,
but don't worry. We' l l l ikely delete some of them off as we go along. See
figure 4.20.

1 17
Figure 4.20

?. N OX.X 0-0 I!I3 EJ

1310.00
1298 .39 Ret 0.786 1300.00
1290.00
1280.00
1270.00
1260.00
1250.00
1240.00

Itj
1232.53 App 0.786
1230.00
1224.1& App 0.886
1220.00
1214.55 App 1 .000
1210.00
1203.60 App 1 . 130
1200.00
1 1 9 1 .63 App 1 .272 1 190.00
1 180.00
27 Jul 11 13 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

Now something interesting, but mathematically predictable, has happened

here. The . 786 projection has landed pretty much right on the horizontal line
from the B point. Why is this? Think about it for a minute. If the C point
retracement is at a .786, then the . 786 price proj ection will just get you back
to start. This leads to some important things to consider.

The deeper the C point retracement, the more the smal ler number price
proj ections are going to fall short of 'taking out' the B point. They may
sometimes form ' double tops' or ' double bottoms ' , or not even get to the
level of the B point. This does not imply that these price proj ection areas
may not be tradable, only that they are no longer, really, ABCD patterns. For
me, the D point of an ABCD pattern must exceed the B point, or it isn't a
'zigzag ' . So when the C point retracement is deep, you might consider what
price proj ections you even start with, to save yourself some time.

Let's move on, and add in the external retracements of the BC leg. I ' l l add in
the 1 . 1 3 , 1 .272, and 1 .6 1 8 retracements. See figure 4.2 1 .

1 18
Figure 4.21

}
11
?: N DX.X D-D II!!El £J

1310.00
1298 .39 Ret 0 .786 1300.00
1290.00
1280.00
1270.00
1260.00
1250.00
1240.00

jtj
1232.58 App 0.78b
1230.00
122�,�a � fl at6
1220.00
12 14,55 � rtmJ
1210.00
1203.60 App 1 . 130
1200.00
ml),e) � 1tw.2 1 190.00
1 180.00
27 Jul 11 18 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

Now, that's truly amazing. All three external retracements hit dead bang on
the price proj ections. This happened, for the most part, for more
mathematical reasons that for any other reasons, though. With the C point
retracement so close to a .786, this mathematically set up the situation so
that the price projections and retracements would land in the same areas.
This is why I like to have C points (and as many other points as I can) as
close to Fibonacci numbers as possible. This leads to more overlap. It' s like
a self-perpetuating thing.

For this example, I ' m going to choose not to add any expansions. As I said,
they are a secondary technique, and although I use them, I feel that to add a
slew of them in here will make the example too confusing for the reader. I
think there will be plenty of numbers to work with as it is. I ' ll now add in
internal retracements from the low on July 1 . By looking at the chart I can
see the possible range would be from the .6 1 8 to the .886, so I ' ll add in the
.6 1 8, the . 786, and the .886 retracements. See figure 4.22.

1 19
Figure 4.22

?: N OX-X 0-0 1!!8 13

1310.00
12913.39 Ret 0 .736 1300.00
1290.00
1280.00
1270.00
1260.00
1250.00

1j
1240.00
1232 ,se �o:lm;

1
� 1230.00
122�,'le � tl 00
1220.00
1214,55 � rttl®
1209.23 Ret 0.7136 1210.00
1203.GO App 1 . 130
1195.65 Ret 0 .83�
1200.00
1 19�,6��1t� 1 190.00
1 1 80.00
27 Jul 11 18 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

Now, the .6 1 8 retracement was dead on the first area, which is the area of
the .786 price proj ection, and thi s points out something else of importance.
Notice that the B point, too, is right at that .6 1 8 retracement. I will get back
to that a little later, but I want the reader to note this. The other two
retracements, they didn't hit the developing groups as closely as I would
have liked, but I ' m not going to worry too much about that j ust yet.

I want to get the rest of the numbers on the chart, and then make an
assessment as to what I ' m going to eliminate. Now I need to back the chart
up and find what other swings I think are significant enough to warrant
doing retracements off of. I ' ll add in a lot more previous data to the chart,
and I ' ll highlight the swings that I am going to work with. See figure 4.2 3 .

1 20
Figure 4.23

'�
N
?. NOX.X 0-0 I![;I EJ

"98 3"" 0 ,78' 1300.00

1250.00

l\
1200.00

\
l //
f1 f\!
1 150.00

K
1 100.00

t�1��
1050.00

K 1000.00

50.00
Mar Apr May Jun Jul AI
Chart created by Dynamic Trader (c) 1996-2001

I have chosen the three highlighted swings because they are the lowest
points in their respective areas. Both the first and second arrows have
additional swings that are very close to their price values, but they aren't
quite as low. I generally disregard such swings in favor of the swing that has
made the larger move. I will now prepare to start doing retracements. See
figure 4.24.

121
Figure 4.24

?: NDKX D-D !lEU:!

1300.00

1250.00

1200.00

1 150.00

1 100.00

1050.00

1000.00

50.00
Mar Apr May Jun Jul AI
Chart created by Dynamic Trader (c) 1996-2001

I ' ll begin by doing retracements off the lowest swing-low on the bottom left
of the chart. I ' l l add in the .236 and .300 retracements. This last number,
.300, although it doesn 't look very 'Fibonacci-ish ' , can, in fact, be derived
directly from <l> quite simply, and is a number that I frequently use. It may
be difficult to see the numbers as I add them in, but if you look carefully at
each chart you should be able to see them. Later I will zoom in on the area,
to assess what we've done. I ' l l now move up to the next swing. See figure
4.25.

1 22
Figure 4.25

?: NOX.X 0-0 I!!I3 a

1300.00

1250.00

1200.00

1 150.00

1 100.00

1050.00

1000.00

50.00
Mar Apr May Jun Jul AI
Chart created by Dynamic Trader (c) 1996-2001

For this swing point I 've added in the .300 and . 3 82 retracements. This only
makes sense, since this swing point is higher, and the up move is hence
smaller, the retracements must be larger. I just jumped up one notch in my
choices of retracements. B oth of these additional retracements show very
close overlap. I ' ll now finish with the last highlighted swing. See figure
4.26.

1 23
Figure 4.26

\�
N
?: N OX.X 0-0 !IS EI

Q" " '0< 0 786 1300,00

1250,00

/l\"---
1200,00

1 150,00

(f\!lul
__

1 1 00,00

v�if��j
1050,00
�

1000,00

�
50,00
Mar Apr May Jun Jul AI
Chart created by Dynamic Trader (c) 1996-2001

Again, following the same idea, I ' ll increase the value of my retracement
choices. Thi s time, though, I ' ll move up a little bit more, since the swing is a
bit larger of a step up. I ' ll add in the .447 and .486 retracements. The
derivations of both of these retracements are in AFTC, for those readers who
are unfamiliar with them.

The .382 would have been a good choice here also, but it turned out to be
above our working area, so I deleted it off to preserve whatever clarity we
still have. These last retracements didn't overlap perfectly as far as I can see,
but they still may be grouping nicely. We' ll see, later, when we zoom in.

Before we zoom in, though, I want to go back and look at the B point for a
second. I said that I like to see additional confirmation at the B point. And I
like the B point to be formed at a Fibonacci number, or numbers. Let's look
at a couple of retracements for the B point, to see i f it is meeting my criteria
there. I've temporarily deleted all the other lines off of the chart, to j ust point
out the B point retracements. I ' ve highlighted the B point with an arrow. See
figure 4.27.

1 24
Figure 4.27

?: NOX-X 0-0 I!Im a

1300.00
1280.00
1260.00
1240.00
1220.00
1200.00
1 1 80.00
1 160.00
1 140.00
1 120.00

23 30 Jun 13 20 27 Jul 11 113 25 Aug

Chart created by Dynamic Trader (c) 1996-2001

The B point was quite 'harmonic' , and it did meet my criteria. I j ust want the
reader to know that this step should always be considered, in my opinion,
when weighing up the trade potential.

I ' ll now zoom in on the potential trade area. I must warn you, though, if you
aren't really well versed in groupings techniques, a zoom in this close, at
first, can look quite j umbled. See figure 4.28.

1 25
Figure 4.28

j1
?. N Ox..X 0-0 '
1!8 Ei

t
1310,00
1298,39 Ret 0,786 1300,00
1290,00

1]1 1
1280,00

j!
1270,00
1260,00
1250,00

m�!u ���
tI j
1240,00
1232.'19 �trJ�
� 1230,00
1220,00
t�5�:�� ��� 1210,00
H8H� ��� 1200,00
11 '35,65 Ret O,88E.
1 191),e� � U� 1 190,00
1 180,00
27 Jul 11 18 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

The first thing I see i s that, to my eye, there are distinct areas. We will
discuss that more in a moment. First, though, I see that the top grouping has
been exceeded, and, as it was, it amounted to a ' double bottom' grouping. So
I will delete that grouping off right now. See figure 4.29.

1 26
Figure 4.29

f t1
?. N [)x..X [)-[) !IS F3

1310,00
1293,39 Ret O ,7SG 1300,00
1290,00

IIfj
1280,00
1270,00

J! I
1260,00
1250,00

l�n!U ���
jt
1240,00

I
1230,00
1220,00
t��§:�� ��V 1210,00
H8H@ �ffi� 1200,00
11S� ,e� !C;w l1ot'1 1 1 90,00
1 180,00
27 Jul 11 18 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

What I see are four somewhat distinct groupings, each one formed around
the four remaining price proj ections for the alternate ABeD's. I would now
wait to see what the price action does. I ' ll move ahead one more price bar,
and make an assessment. See figure 4.30.

1 27
Figure 4.30

f 11
?: NDX.X D-D 1!18 F!!

1310.00
1298.39 R€:t O .78G 1300.00
1290.00
1280.00

l1Ij
1270.00

jj
1260.00
1250.00

l�n!U g,��
1240.00

\J j
1230.00

t
1220.00
l �if:.2�
�� �
.et �� 1210.00
H8i:�� tMSl:�
u ., 3

1200.00
1 1SU� � U� 1 190.00
1 1 80.00
27 Jul 11 18 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

The price action has driven right through the .886 price proj ection grouping.
I will now delete that grouping off of the chart. See figure 4.3 1 .

128
Figure 4.3 1

tJ
?: N OX,.X [)-O !IS F..3

f
1310.00
1293.39 Ret 0.786 1300.00
1290.00

l)fj
1280.00
1270.00

J!
1260.00
1250.00

)t t j
1240.00
1230.00
1220.00
l al §! � et �.,�"
�u .2101� � 1210.00
H8H@ rMffi� 1200.00
1 190,e� � U� 1 1 90.00
1 180.00
27 Jul 11 18 25 Aug
Chart created by Dynamic Trader (c) 1996-2001

Now, again, I can j ust wait and see as the price action continues to develop.
I ' ll add two more price bars, and reassess. See figure 4.32.

1 29
Figure 4.32

11
?. NOX-X 0-0 1!!18 J!I

t
1310,00

[ lIl
1298,39 Ret 0,781', 1300,00
1290,00

j
� r)fl
1280,00
1270,00

J
1260,00
1250,00

1j
1240,00
1230,00
1220,00
i��f:�� ��mo 1210,00
HBi :2� �ffi� 1200,00
119U� � 11� 1 190,00
1 1 80,00
27 Jul 11 18 25 Aug 8
Chart created by Dynamic Trader (c) 1996-2001

We are seeing a repeating pattern here. Although it looked like a reversal

might start on the second to last bar, a new low for the move came on the
following bar. Now, would this have triggered a trade on the lower
timeframe, before this new low was set? Perhaps. It would depend on what
type of an entry trigger you chose, and how sensitive it was.

This is one of the reasons I chose this example. If you did get triggered on
this blip up, you would be waiting to see what was going to happen with
your trade. Whether you get stopped out or not will depend on where you set
your stop. I like to set my stop j ust outside of the farthest grouping, but if the
area is wide this may not always be feasible. In that case, I frequently set the
stop just outside of the next grouping after the one I take the entry off of.

Let's move on. Even though the 1 .000 price proj ection grouping has not
reversed the price action, I ' m going to leave it on the chart, for reasons that
will become clear momentarily. See figure 4.33 .

130
Figure 4.33

I 11
?: N OX.X 0-0 !II:;:( F!J

1310.00
1298.39 Ret 0 .786 1300.00
1290.00

lfll
1280.00
1270.00

JI
1260.00
1250.00

jt
1240.00

I
1230.00
1220.00
mf:�� ��Mr 1210.00
H8H@ �8':� 1200.00
1190 ,e� Row llazJ2 1 190.00
1 180.00
27 Jul 11 18 25 Aug 8
Chart created by Dynamic Trader (c) 1996-2001

There, finally a price bar that has taken out the high of a previous bar.
Maybe a reversal is starting. Notice how the 1 .000 price projection grouping
was fully exceeded, but the 1 . 1 3 price projection grouping was ' missed' by
j ust a fraction. I ' l l add one more price bar, and we'll assess what is
happening. Do you think it is going to reverse back down and hit the 1 . 1 3
grouping, or the 1 .272 grouping? See figure 4.34.

131
Figure 4.34

j
11
?. N OX-X 0-0 1!!18 £I

1310,00
1293,39 Ret 0 ,786 1300,00
1290,00

llfl
1280,00
1270,00

)1
1260,00
1250,00

Ij
1240,00
1230,00
1220,00
t� i�!.2:::
�� �r:
et .J� 1210,00
HBH� ���
U ::-

1200,00
1190 ,e;; � U� 1 190,00
1 180,00
27 Jul 11 18 25 Aug 8
Chart created by Dynamic Trader (c) 1996-2001

Nope, another up bar. Pretty much regardless of what lower timeframe entry
I would have chosen, I would have been in the trade for a while now. Even if
an entry was taken off of the 1 .000 grouping, a stop below even the next
lower grouping was not threatened. Let ' s see how this played out. See figure
4.3 5 .

1 32
Figure 4.35

?: N DX.X D-D SGU!J

1380.00
1360.00
1340.00
1320.00
12gg.3g Ret 0 .786 1300.00
1280.00
1260.00
1240.00
1220.00
1200.00
1 180.00
27 Jul 11 18 25 Aug 8 15 22 29 Se�
Chart created by Dynamic Trader (c) 1996-2001

A strong reversal was made off of the ABCD pattern, and a very large move
ensued. Now comes the evaluation part of the example. The NDX didn't
reverse off of any of the groups. In fact, it didn't even reverse off of a single
number. So, I can hear a few people saying ' What good is that? '

Well, it reversed j ust fractions away from the 1 . 1 3 price proj ection grouping,
or j ust a small amount below the 1 .000 price proj ection grouping. This is
something I see quite frequently, a reversal coming in the area j ust between
these tight groupings. In the context of the price value of the index and the
ensuing move, though, I consider thi s nothing short of phenomenal.

This is the point I alluded to earlier. Don't try to pinpoint a move like this to
the nearest penny; it can't be done. Don't lose sight of the larger, holistic
picture, and that is that the ABCD is the pattern we are looking at. Is it still a
nice 'two-step'? Do you have a pretty good i dea where the pattern m ight
complete? These are the things that we are trying to determine, and not the
exact price point, to the penny, that the issue may tum on.

1 33
I follow this procedure because I think that the area I come up with has the
potential to be an area that something might happen. Once the area is
determined, the emphasis shifts to the l ower, trigger timeframe, and on to the
behavior of the issue with respect to the chosen entry trigger. The price, with
respect to the exact placement within the grouping, then becomes secondary.

As long as this is understood and kept in m ind, I feel that the techniques
presented have a lot of potential. I understand, too, that this has been a lot of
material to absorb. I encourage the reader to experiment with what has been
offered and see what, if any, of it will be of value to you.

In the last chapter I will take a very brief look at time symmetry in ABeD
patterns. I will present little more than a primer on the topic, but I want to
stimulate the reader by presenting this food for thought.

1 34
 Chapter 5

ABeD Time Symmetry

The question frequently comes up, i f you can apply F ibonacci retracements
and projections to price, can you also apply them to time? Thi s i s a very
interesting area, and one that i s overlooked by most traders. It is outside the
scope of this book to do a detailed examination of thi s topic, but I want to do
an introductory excursion into some of the things that one can look at with
respect to ABeD patterns.

It is my belief that the concept of using F ibonacci retracement, proj ection

and grouping techniques is just as valid with time as it is with price. In other
words, I feel that time is j ust as 'harmonic' as price. In the case of an ABeD
pattern, the length of time it takes for each leg to form can, frequently, be
related in some way to the lengths of time the other legs take to form. There
can also be a relationship between the length of time it takes the AB leg to
form and the time lengths of previous swings outside of the potential ABeD
pattern. It would fol low, too, that the length of time that it takes the entire
ABeD pattern to complete could also be related to the time lengths of
.
prevIOUS swmgs.
.

This should all sound familiar, since these are the same premises we have
used so far with price, to accomplish what we have up to this point. In this
chapter I will j ust examine some basic relationships, in order to provide the
reader with some serious food for thought. The most important aspect of this
topic, in my opinion, i s the synergy that I feel occurs when price action is
pointing to a certain area, and when the price reaches that area, the time
factor is saying 'now' . If this area is also the area of the completion of a
pattern, you have a potential threefold synergy. This adds to the level of
confidence I have in trading that area, and it is the basis for a large part of
my trading.

135
Let's look at a few simple examples. I ' ll go back to the AVY example first.
AVY formed a 1 .000 ABCD pattern, and really moved off of the potential
trade area. Let' s first recall what the trade looked like. See figure 5 . 1 .

Figure 5.1

?: AVY I)-I) �,
I!!I3 F3

21 28 Oct 12 1'3 26 Nov '3

Chart created by Dynamic Trader (c) 1996-2001

The first thing I want to look at is the time relationship between the AB leg
and the CD leg. This is a lot easier if the software that you are working with
can do the calculations for you, but you can actually count bars and use a
calculator, doing it by hand i f you want to. I ' m going to add a 1 .000 time
projection onto the chart, in much the same way a price proj ection is done.
See figure 5 .2.

1 36
Figure 5.2

[5 1 .000
_�\.'JI�.nil' ._ll:llx

50 . 155 Ret O.7SG

rso.ooo

II
t1
j
M9.000

1I
M8.000

1) f1
[47.000

I f 11
ilM� R� 11$'00
M6.000
I I I I

[45.000
1 10ct01 190ctO 1 240ctO 1 1.000
ATP 1Nov

[44.000

21 28 Oct 12 19 26 No
Chart created by Dynamic Trader (c) 1996-2001

What is quite clear here is that the length of the AB and CD legs are equal.
Not only was the price move for these legs pretty much equal, so was the
time it took for those legs to unfold. It' s simply not possible for me to
believe that this is random, given the almost endless number of examples
that I 've seen over my trading career.

Before we move on, I want to point out something that was mentioned in the
price construction phase that also applies here. When doing this 'real-time ' , I
would be putting the time proj ections and retracements on the chart ahead of
time, that is, before the price action reaches the area. Just like forming price
groupings, I would set up time groupings.

I don't focus on one time proj ection or retracement, j ust as I don't focus on
one price proj ection or retracement. What I am showing in this chapter is
'after-poker' . I am j ust trying to show, briefly, not only the techniques
themselves, but also some examples of the time symmetry and time
harmony.

1 37
I am not, however, showing any examples 'as they unfold', trying, as I did in
previous chapters, to simulate how a potential trade may look as it unfolds in
'real-time ' . I point this out so that there is no confusion on how I apply the
techniques, or what it is that I am trying to demonstrate here. I have a work
in progress, as a follow up to AFTC, on time groupings. The reader is
directed to seek that material out if a fully detailed work on the topic is
desired. Let's continue on.

What about an AB leg time retracement? Can we do a time retracement of

the AB leg, to give us time targets for the BC leg to complete? The answer is
absolutely. Let's see how the AB leg time retracement worked out on the
AVY example. See figure 5 . 3 .

Figure 5.3

?: AW 0-0 l!61 EJ
TCR 240ct
f52.000
1 10ctOl 190ctOl 0 .500
I I I
-51 .000
--;===== 50. 155 Ret 0 .786
-50.000
-49.000

�8.000

�7.000
[46.000

�5.000
[44.000

21 28 � u � � �
Chart created by Dynamic Trader (c) 1996-2001

The BC leg was a .500 time retracement of the AB leg. Now that leads to
something interesting to think about. The BC leg was a .786 price
retracement, but it was a .500 time retracement. There isn't always a similar
retracement value between price and time, but I don't feel they have to be
the same. Although I always pay c lose attention when I see a .6 1 8 price and

138
time retracement, it may j ust be that I really l ike . 6 1 8 ' s. As long as the time
calculations are 'harmonic ' , that' s what I ' m looking for.

Now, readers that are fami liar with AFTC may be saying 'I thought you
didn't use the .500 retracement, I thought you used the .486?' I do use the
.486 instead, for price retracements, as well as for time retracements. In
practicality, the difference is so minor, though, that it would, likely, be hard
to see any difference. I ' ll put a .486 time retracement on the same chart
instead of a .500, and let's assess what we see. See figure 5 .4.

Figure 5.4

::'-=. AVY D-D i!!IEI £I

TCR 240ct
[52,000
1 10(tOl 190ctO 1 0,4$i;

Itt1 tItII I
[5 1 ,000
I I I

j
50,155 Ret 0 ,736
[50,000

Jj
11
!
_

j
f49,000

1
f4a,ooo

f1
)jff!1
f47,000
I

f46,000
�,� �� 11iWb

j
f4s,ooo
f44,OOO

21 28 Oct 12 19 26 No
Chart created by Dynamic Trader (c) 1996-2001

There is no discernible difference in this example between the .500 and the
.486 time retracement. Let' s wrap this example up with the last time
calculation that I normally do within a potential ABCD pattern, and that's
the BC leg ' external retracement' . If the BC leg time retraced back .500 and
the CD leg time proj ection was 1 .000, it stands to reason that the ' external '
time retracement of the BC leg should be a 2.000. Let me add thi s
retracement onto the chart. See figure 5 . 5 .

1 39
Figure 5.5

?. AVY D-D I!!I EI £J

�1 ,000
50, 155 Ret 0 ,786
-50,000

11
Jj )
-49,000

1
)f f) f1
-48,000

_
I

1
-47,000

j j
� ,�.\4 �f.P l1amo
-46,000
L _
_ L ___ . I
190'tO 1 240(tO 1 2,000
TCR 1No\l
-45,000

-44,000

21 28 Oct 12 19 26 Nc
Chart created by Dynamic Trader (c) 1996-2001

It is quite clear from the chart that the CD leg was twice as long, time-wise,
as the BC leg. I ' l l apply the same reasoning that I applied to the .500 versus
.486 time retracements from the last chart, this time with the 2.000 versus
the 2.058 that I prefer (see AFTC for derivations). See figure 5 .6.

1 40
Figure 5.6

?. AVY 0-0 !lEl D

-51 .000
50. 155 Ret 0.786

jI
-50.000

)
11
1
-49.000

1
1
-48.000

f1
I

)j f 1 t
r+7.000

f46.000
� ,� �* 11amb

I I I

f4S.000
190(tO 1 240(tO 1 2 .058
TCJ;: 1Nov

M4.000

21 28 � u � � �
Chart created by Dynamic Trader (c) 1996-2001

Again, there i s no discernible difference between the 2 .000 and 2.05 8 time
retracements in this example. The most important thing is to grasp the
concept of what I ' m looking at here. Let's look at one more thing before we
move on to another example.

Let me put two of the time calculations we've j ust looked at on the chart at
the same time. They fal l in the completion area of the potential ABCD. Keep
in mind that these calculations can be done before the price reaches that
area. They can be done once the C point is complete. See figure 5 .7 .

141
Figure 5.7

?. AW D-I) 1!!113 £I
[5 1 .000
50 . 155 Ret 0 .78G
fso.ooo

11
J
-49.000

1
-48.000

f1
I
-47.000
46 1�.w I'l.fo\l 11iW'b
-46.000
I I I
190(tO 1 240ctO 1 2 .058
TCR 1No\! -45.000
I I

f"44.000
1 10(t01 190ctO 1 240(\0 1 1 .000
ATP 1No\!

21 23 � U " � �
Chart created by Dynamic Trader (c) 1 996-2001

Can you see the overlap? This is the start of a time grouping. The building of
time groupings is very similar to the building of price groupings.

1 42
Let's look back at the CIEN example, whi ch, as you' l l recall, was very close
to a 1 . 1 3 alternate ABCD. We' l l start with a refresher chart. See figure 5 .8.

Figure 5.8

?: elEN 0-0 !IS £'J

1 1 0 .000

100.000

==��*¥tt===����== �U2� �fW6 70 . 000

........
.. . .4, � � �
- -- ------

26 Jun '3 16 23 30 Jul 14 21 28 Aug 11 18 25 !:

Chart created by Dynamic Tr ader (c) 1 996-200 1

This was the example where CIEN came back down into the potential trade
area and set a nominal new low. Let's see how the time length of the CD leg
compares to the time length of the AB leg. See figure 5 .9.

1 43
Figure 5.9

pl 75.000

70. 000
U;�Uif�

��i� ��� 5 . 000

I I I
1 1JuIOO 19JuiOO 25JuiOO 1.000
ATP 3Aug
23 30 Jul 14 21 28 Aug
Chart created by Dynamic Trader (c) 1 996-2001

In this example, the CD leg, again, was the same time length as the AB leg.
Although it is not uncommon to see a CD leg much shorter than the AB leg,
it is something to note, especially when considering probabilities. If this
factor was taken into consideration, perhaps a trader m ight have waited on
that first plunge into the lower grouping on the chart.

Another possibility to consider is to pass on groupings that are hit before

certain time parameters have been satisfied. There are an infinite number of
ways to put all thi s together, and traders have to decide for themselves how,
if at all, they want to use thi s in their 'Trading Plan' .

1 44
Let's look at the time retracement of the AB leg. See figure 5 . 1 0.

Figure 5.1 0

:::-:: elEN D·D I!IEl £I

TCR 2bJui
1 1JuIOO 19JuIOO 0.73b
I I I

pI 75.000

70.000

5.000
23 30 Jul 14 21 23 Aug
Chart created by Dynamic Trader (c) 1996-2001

The BC leg was a .786 time retracement of the AB leg. Although not shown
on the chart, the B point was a near exact .6 1 8 price retracement. They don't
match, but as I mentioned, my main concern i s that they each be at
Fibonacci numbers. Let ' s now look at the BC leg external time retracement.
See figure 5 . 1 1 .

1 45
Figure 5.1 1

p)
75 , 000

70 , 000
I�i�i ��

�u� ��mt
5 , 000

I I I
19JuiOO 26JuiOO 1 .272
TCR 3Aug
0 , 000
23 30 Jul 14 21 28 Aug
Chart created by Dynamic Trader (c) 1 996-2001

The completion point is right at a 1 .272 time retracement. Although not

every leg of every ABCD I see i s as 'time harmonic' as the examples
presented here, I do see a lot of time symmetries in the ABCD' s that I look
at. I use the price and time 'harmony' to make decisions on how much I like
a particular pattern for a potential trade. If the symmetries j ust aren't there, I
simply pass and keep looking.

Let me make one additional point here. Some authors do not like to use the
.786 and 1 .272 for time retracements. Myself, I have found them to be useful
for my own trading, and hence I use them. I haven't seen the research data
that has led anyone else to conclude that those particular time factors aren't
useful, so I can't comment on how their conclusions were drawn. What I
suggest is, as the reader experiments to determine what he or she wants to
use in his or her 'Trading Plan ' , pay particular attention and be particularly
critical with these two time factors. I use them, but the fact that some rej ect
them should be noted.

1 46
Let me finish up with a l ook at the AA example from Chapter 1 . The ABCD
pattern that we looked at was very non-symmetrical, time-wise. Let' s look at
a chart to refresh our memories. See figure 5 . 1 2.

Figure 5.12

:::.: M D-D I!S £'I

20 . 000

1 9 . 000

1 8 . 000

1 7 .000

1 6 . 000

1 5 . 000
--1----- 14.53 1 App 1 .000
D
1 4 .000
19 26 Jul 10 17 24 31 Aug 14 21 28 Sep 1 1 18 25 0ct 'l 1
Chart created by Dynamic Trader (c) 1 996-2001

Let me put a F ibonacci time proj ection on the chart. Thi s will show a
F ibonacci time ratio of the CD leg to the AB leg. The ratio will have to be
quite small , since the CD leg is a l ot shorter in time duration than the AB
leg. See figure 5 . 1 3 .

1 47
Figure 5. 13

?. M 0-0 1!!J8 £J
A

18.000
c
17.000

16.000

15.000
---4---- 14.53 1 App 1 .000
D
14.000

10 17 24 31 Aug 14 21 28
Chart created by Dynamic Trader (c) 1996-2001

The CD leg was a .236 time ratio of the AB leg. Even with such a large
difference in the time duration of the two legs, there was still a time
harmony.

I hope these examples have stirred an interest in the reader. I feel that this is
an underexplored and underutilized area, and one that is worthy of study. It' s
my opinion that the addition of time studies has greatly helped me in my
own trading. I strongly suggest that all traders further investigate this very
interesting topic.

148
 Conclusion

I feel that the ABCD pattern is a great potential additional to any trader' s
arsenal. Of course, I encourage all traders to experiment, modifY, and test
the pattern and its variations, and see what aspects, if any, might be of use in
their individual plans. Not every trading concept is suited to everyone.
Personally, I really l ike thi s pattern. When it forms as a correction to a
significant trend, I really pay attention.

A large percentage of my trades are category one ABCD patterns that are
also category two or three patterns in the lower timeframe. I have found few
setups for finding potential trade areas that I like better than these category
one and three combination patterns, especially if they have strong time
symmetries. Combined with one of my preferred entry triggers on a lower
timeframe, this is, perhaps, my favorite way to trade.

1 49