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Bronco Capital's ABCD Harmonic Pattern Journal

  • Post #1
  • Quote
  • First Post: Edited at 6:08pm Jan 16, 2013 5:22pm | Edited at 6:08pm

Welcome to my little corner of ForexFactory


My goal here is to document my trades while building a discretionary/subjective trading system using the (in)famous ABCD Harmonic pattern. This journal is a jumping off of the fantastic thread started by Mr. Pip in the Trading System section.

I will slowly be rolling out everything you need to know to understand what I am doing, why I am doing it, and how you can do it yourself if you so desire. In the end though, this will not be a turn-key forex ATM. You must put in the effort, learn, and participate. As my caption says "Not a Teacher Nor a Student". You, and only you, can be the teacher and the student.

For the time being, I kindly ask you not to post until I have established the system and open the thread up for questions.

Thanks.

Happy Trading!
Bronco Capital
  • Post #2
  • Quote
  • Edited Jan 17, 2013 9:46am Jan 16, 2013 6:30pm | Edited Jan 17, 2013 9:46am
The ABCD Pattern--

The ABCD Pattern is defined by four points labeled A, B, C, and D. The points define a repeated style of market movement on (almost) all time frames and in (almost) all markets.

Picture is worth 1000 words--
http://farm9.staticflickr.com/8497/8...584fe7cf35.jpg

But words can be descriptive too. The pattern forms in the following way. A major market swing (or wave or what ever you want to call it) occurs between point A and point B forming the "AB Leg". The market then reverses direction and "retraces" most of the AB Leg. This forms the BC Leg, with the caveat that point C cannot surpass point A. The market then resumes its original direction (same as the AB Leg) to form the CD Leg. See the picture above to get a mental image of a completed ABCD.

Now we will add the Fibonocci Ratios. If you do not know about these ratios there are plenty of good references online such as this. We really care not why the work or how they work, we only care about the key ratios of 0.618 and 0.786. These two numbers set the allowed amount of retracement the BC leg can go relative to the AB leg.

Here is how it works--The distance in pips of the AB leg sets the ABCD pattern. Say it is 10 pips. Therefore we need the BC leg to retrace at least 61.8% of the AB Leg. Mathmatically: BC >= 0.618AB or 6.2 pips. Of course, as stated earlier, point C cannot be past point A, or mathematically: BC < AB. We also key in if the retracement reaches 78.6% of AB, = 0.786AB or 7.9 pips in this example.

So, the ABCD pattern is valid if, and only if, the BC leg retraces at least 0.618AB without retracing the complete distance (1.0AB).

As for the CD leg. Traditional harmonic traders will look for a D point such that the CD leg equals the AB leg. In the above example, the AB leg was 10 pips, so the CD leg would be 10 pips. Therein lies the harmony of harmonic patterns. (It is actually more harmonic if the C point is exactly 61.8%AB or 78.6%AB, but that is unimportant for my system.)

So, good with the ABCD pattern? It works in up trends and down trends, even in range bound markets. Once you start to see ABCD patterns, they will jump out everyone. I will post some examples shortly.

Cheers!
  • Post #3
  • Quote
  • Edited Jan 17, 2013 9:46am Jan 16, 2013 6:47pm | Edited Jan 17, 2013 9:46am
An ABCD Example

EURUSD 15min chart
http://farm9.staticflickr.com/8493/8...ac5c9ce6_b.jpg

So, a major down wave in the EURUSD occurs from 1.33932 to 1.33340. This gives an AB leg of 59.2 pips. The market then retraces higher reaching both the 0.618AB level (at 1.33706) and 0.786AB level (at 1.33805). The market does not fully reach the A point again, then retreats lower to form a symmetrical CD leg reaching ~1.33250.

These patterns are everywhere. Some will be steep and rapid, some will be slow and grinding. Some are on the 1 minute chart, others on the daily. They truely are a universal pattern.

Next (tomorrow likely), I will show you how I trade them.

Cheers!
Good morning traders--

I wanted to provide a look at the future. Here is a screenshot of my trading yesterday.

EURUSD 1min
http://farm9.staticflickr.com/8236/8...c70c59c2_h.jpg

It was a busy day, maybe, slightly over traded, but I am currently in the process of getting enough trade to have statistical validity to my system. This is a corner stone to high quality system development.

Each colored line is an ABCD. Some were failures like the pink line. Some only reached the 61.8% retracement level (Green, Purple). Some reached both 61.8% and 78.6% (Red-dotted). Yesterday ultimately had too many trades not reached the 78.6% which cut into my gains. For the day, I traded 6 ABCDs and was successful on 3 of them for 50% win rate. I netted out 1.3R, which I will explain later.

Just a little tease, next comes the rules.

Cheers!
  • Post #5
  • Quote
  • Edited at 5:27pm Jan 17, 2013 2:25pm | Edited at 5:27pm
Ahhh, of course I decide to start a thread, then have a crap trading day. But that is the way it goes, win some, lose some, just hope to win a few more.

THE RULES--

**Remember, this is a system development journal, it is not complete nor refined, rules can change at any time**

1.) Identify an AB leg. This is a swing that is notable whether because of continuity of the move, made new highs or new lows, just movement in the currency that is easy to identify.

2.) Determine the length of AB in pips.

3.) Set Entry 1 at a 61.8% retracement of AB, this will be a pending/resting limit order. Mathematically, this is B + 0.618AB (for shorts), B - 0.618AB (for longs). Easier is to let your platform determine the level by using the Fibonacci retracement tool.

4.) Set Entry 2 at a 78.6% retracement of AB (B +/- 0.786AB). Again a limit order.

5.) Upon filled limit, immediately set a target for the B level (limit order) and a stop 1 pip past the A level (stop market order). Some platforms will allow you to combine steps 2+4 and 3+4, depending. Otherwise, I suggest that you focus first on setting the stop, then the target as the stop is closer to the active price than the target.

6.) Cancel either the stop or the target when the opposite fills.

Graphically it goes like this (using EURUSD 1min from today, times EDT)--

First identify wave (Point A is the low around 0945, Point B is the high around 1400)
http://farm9.staticflickr.com/8493/8...bca5e0c4_b.jpg

Then place entry limit orders on the 61.8% and 78.6% retracement levels
http://farm9.staticflickr.com/8043/8...75e8ec48_b.jpg

Then, if the market moves similar to the yellow line and both entries are triggered, set the stop and target levels,
but set targets and stops after the first is triggered, then update if the second is triggered. Sometimes the 78.6%
will not trigger.
http://farm9.staticflickr.com/8214/8...99c355dc_b.jpg

I will discuss position sizing, risk management, risk:reward characteristics, win %, etc later. First I just wanted to set down the basic procedure for the system.

As you can see, after the wave is identified, the trading is mechanical, but the initial wave identification is subjective.

More to come...
  • Post #6
  • Quote
  • Edited at 5:57pm Jan 17, 2013 5:24pm | Edited at 5:57pm
Putting the cart before the horse here, but my results for today are below.

It was a rough session, I was not on point. Yet, I am just trying to get trades under my
belt, so these count in the statistics and will be used to refine the system later on.

For now, I have cleared my charts of all the fib lines and await a new day (they always come!).

EURUSD 1min
http://farm9.staticflickr.com/8473/8...d58558ca_h.jpg

Here is a breakdown of the trades. I got to my trading desk at the vertical blue line.

Red ABCD--The red down wave dominated the price action. I set sell limits at 61.8% and 78.6%. Ultimately both failed, although the initial 61.8% gave a win-win set-up which I will be describing later. -1R

Black ABCD--The black upwave was the first major retracement of Red. Only 61.8% entry was triggered. Trade went to target and beyond to the 127% extension. +1R

Yellow ABCD--Smaller down wave, all within the context of the large Red. Both limits filled, got basically top-ticked at the stop level before it ran to target. It happens, no crying over spilled milk. By the way, there is a micro ABCD within the Yellow wave before the limit orders are filled. For that micro ABCD to work, the Yellow had to fail, something to note. -1R

Pink ABCD--Formed from the 100% reversal of Yellow. 61.8% filled and ran to a win-win setup (green line) but I did not trade it, a mistake. Then retreated back to the stop after 78.6% filled. -1R

Blue ABCD--Formed from the 100% reversal of Pink and forms a win-win setup based on Black. Post 61.8% fill, it too had a win-win setup, again untraded, and a mistake (Green line in the chop). Ultimately failed, but in doing so Black ABCD went to target. -1R

5 trades, 1 winner (20%) for a net -3R. I will be discussing "R" later as well. Had I taken the two win-win setups, I would only be -1R, so smarting a bit there too.

I stopped trading after Red went to stop as my 9-to-5 had priority.

I will very soon post the win-win setup along with a discussion on money management and trade statistics.

Slow and steady!

Cheers!
After the Fact Cherry Picking

But these patterns can be found everywhere. Some work, some do not. The whole
point of trading these is to find when they do, when they don't, etc.

EURUSD 1min
http://i.imgur.com/kiFb3.png

I do not like being a "Monday Morning Quarterback" and seeing these after they form,
but in identifying them after the fact should give credence to trading them in real
time. I will also post examples where they did not work. Of course, in the image
above, any time you would have tried to go long the similar down wave, you would
have lost...
Quick update, busy Friday night--

Not a lot of time to trade this AM, blue line was when I got to my trading desk and left as the final ABCD failed.

Painful as well, 3 losses.

First refinement to the method coming this weekend. First going to compile the week's statistics
and see if my qualitative observations are actually quantitatively supported.

For now, the chart, EURUSD 1min
http://farm9.staticflickr.com/8367/8...d6cc2878_h.jpg

And descriptions--

Red ABCD: the main morning swing, setting the range going forward.

Green ABCD: A nice with trend opportunity, just stopped out. Again, it happens. -1R.

Blue ABCD: Slightly odd trade as the chop before this swing formed is a bit excessive (including Green).
This was more of a test to see if larger moves are better than smaller. Not in this case. It did try to mount
a move to the win-win setup, but fell short. -1R.

Pink ABCD: Zoom loss, no real opportunity for success here. -1R.

My 9-to-5 cut in to trading time today, but the charts look pretty ugly on the 1min for other ABCDs.

Thoughts and changes later. Bye for now.
A look at the past--

The key to system development is collecting sufficient trade data to draw statistical conclusions and
determine future probabilities.

So here we go, a summary of the week's trades:

21 total trades over the full 5 days.
4 trades were 2.3R winners (meaning both 61.8 and 78.6 entries were triggered and proceeded to target).
5 trades were 1R winners (only 61.8 entry was filled before going to target).
12 trades were -1R losers.

Net result was +2.2R

Win rate = 41.9%
Average win 1.58R
Average loss -1R

----------------------------------

My current thinking is the 78.6% add-on entry is not sufficiently adding to returns to be worth the risk.
By default, every loser hits that add-on trade whereas every winner does not. More than half of
my wins this week did not hit that value.

Had I not traded the 78.6% level, I could have increased my average win to ~1.6R and my total net
to ~2.6R while removing risk.

I will hopefully have time for a detailed explanation of 'R' this weekend.

----------------------------------
Commentary--
I had a string of losing trades Thursday and Friday, about 5 in a row. Even with that, I was still
profitable on the week showing that a positive reward to risk setup can overcome unfavorable
markets.

Next week I am going to remove the 78.6% level and track the results. I will also comment if the
level would have been supported or just by-passed on the way to the stop.

These look-backs into past trades will help refine the system, show weaknesses and strengths,
and ultimately aid in creating a strategy for future profitable trading.

Enjoy the weekend!
Okay, taking a step back.

The posting here is more true than the original poster may even know. Perseverance and truly learning a system or style of trading is absolutely key to a successful trading business. I think of it like a new love. It starts hot and heavy, "sealing the deal" is easy, wins come left and right, then it goes cold, interest fades, a new love appears. I am horribly guilty about jumping from one system to the next. ABCD trading will be my one and only love, a commitment that will take everything I have.

Similarly, real life work, hobbies, outside commitments can derail progress in learning a system. This month, for example, I have produced 2.5 months worth of data for my job, but in doing so, have not placed an ABCD trade this week. Balancing interests while staying committed and engage in system/style development will be key.

So, still more to come, especially some philosophical, ideological discussion along with thoughts on system development. ABCDs will be identified as well.

Tune in!
  • Post #11
  • Quote
  • Edited Jan 29, 2013 12:25am Jan 28, 2013 5:24pm | Edited Jan 29, 2013 12:25am
Okay, back in the saddle, with the beginning of a monster update.

As I stated earlier, initially finding an interesting system or strategy is like finding a new lady. Hot, intense, a bit reckless until reality sets in. After reading Mr. Pip's thread, I began trading ABCD patterns successfully, but recklessly. So I have put on the brakes and will begin a thorough, systematic investigation of ABCDs.

So to start, a picture (as they are always worth 1000 words)--

EURUSD 5min from 01/28/2012
http://farm9.staticflickr.com/8351/8...41852ea2_b.jpg

I am showing this to provide the visual framework for what market moves I am interested in.

Basic Strategy (an update)--

Unlike what I presented before, I have simplified the basic strategy even further by removing the 78.6% retracement add-on trade. While it does lead to improved risk:reward ratios, the fact that the add-on is not a guaranteed entry means my win% and R:R is trade dependent, which complicates the statistics.

So, for now, only trading the 61.8% retracement entry. I am keeping the target at the B level +/- 1 pip and the stop at the A level +/- 1 pip. The added pip on the target is to keep risk:reward balanced as well. These parameters and levels gives a risk reward of 1:1.618 (and yes, that is harmonic ). That is to say every winner should be 1.618 times as large as a loser.

In the image above, the while wave from point 'A' to point 'B' sets stage. The market retraces through the 61.8% retracement (white box). Then returns to point 'B' and beyond. So, the simple system produces a winner.

Now, while I will be demo trading the simple system, I will also be tracking other market movements to see if there are other opportunities missed by the simple system. The screen above shows a bunch of the variables (market moves) I will track.

1.) 78.6% retracement (above this is true)
2.) "AB from C", meaning the market moved the length of AB from point C (as shown in dashed white line).
3.) 38.2%BC, Mr. Pip uses this level to move his stop to break-even.
4.) 61.8%BC, Mr. Pip uses this level as his target.
5.) 127.2%AB, if the C fails and market hits stop at 'A', what is the probability it will continue to 127.2%AB. This would be a stop and reverse trade.

*There could be more, these are the key moves I have chosen to identify so far.

Again using the chart above, you can see that the White ABCD satisfied #1, #2, #3, and #4 above, but not #5 since the position was not stopped out at any time.

On the other hand, the Yellow abcd has two distinct moves, and depending on the final system, a few outcomes can be determined. Yellow abcd hits both the 38.2%bc (#3) and 61.8%bc (#4) levels (I have not drawn fibs here, but take my word for it), but does not reach simple system target 'b'. It then turns around and hits 78.6%ab (#1) and 127.2%ab (#5). Statistically it is complicated, but at least it shows that depending on final system parameters, it was a win or a loss or a loss-win.

Hence the reason for tracking a sufficient number of trades to fully understand the probabilities that the ABCDs provide.

Just using those two trades, I could have the following outcomes.

61.8%BC as final target = 2 wins
'B' as final target = 1 win (1 BE or 1 full loss depending)
127.2%BC stop and reverse play = 1 win

In the end, it gets very complicated and detailed logic trees are needed (and I hope to provide). In the meantime, I hope you can see that depending on how one trades, different results are possible. Randomly choosing targets and stops without statistical reasoning will lead you to accidental success or failure. You must understand and design your system based on real-life trades of sufficient number that unique market conditions, luck, randomness, and all the other variables are minimized and you are left seeing your possibilities for what they statistically are.

Easy, right? Ha!

More to come!
I do not know if this will help or cause confusion, but see if you can follow this trade logic tree.

Good luck!

http://farm9.staticflickr.com/8362/8...ced67639_b.jpg
All right, EA is written and functioning (nearly) perfect, so it is time to start documenting trades.

Before that I will show you an example chart and the output from the EA. But before that, I will
define the inputs, the algorithm, and then the output.

So we start with the inputs after the EA is dragged into the chart of choice (EURUSD, for me).
I manually draw the fib on the desired waves and it shows the 0% and 100% AB prices (see screenshot).
I manually input these two prices, along with account balance and % risk (position sizing, not in use currently),
along with the color I drew the fib lines. I use color to help identify different trades.

http://farm9.staticflickr.com/8071/8...3104506e_z.jpg

So, the key inputs are the two prices and color.

From there the EA places a limit order at the 61.8% AB retracement level along with take profit and stop loss at
the 0.0% AB and 100.0% AB levels, respectively.

It also creates a text file with vital information before, during, and after the EA starts.

So, here is a screenshot for the "Green ABCD" along with the text file.
http://farm9.staticflickr.com/8464/8...dfd7af47_h.jpg

http://farm9.staticflickr.com/8084/8...b8cc32bb_b.jpg

So, as you can see, the text file records all the goodies.

*The initial settings including prices, AB wave size, position sizing, etc.
*It then records entries and other critical levels hit following the flowchart posted previously.

There it is. The reason I wrote this is that I need to be able to draw some fibs, then go back to work,
home life, my garden, sports, what ever. The key is for me to identify the wave from A to B, then
let the script and the markets do the rest.

So, I hope to amass 25-50 trades and I will post screenshots of the chart and text file. I will not
critique or analyze anything until at least 25 trades. From there I will summarize results, discuss
issues and ideas, then hopefully be ready for some live, skilled trading.

Cheers for now!
  • Post #14
  • Quote
  • Edited Feb 2, 2013 11:14am Feb 1, 2013 11:34pm | Edited Feb 2, 2013 11:14am
First Day--

And it was not pretty, but that is not the point. The idea is to see what works and what does not
before tweaking anything, before putting putting hard-earned money on the line, before giving
up.

Below is a spreadsheet of the trades. The fib 'color' identifies the trade. The spreadsheet basically
tracks the order in which an initiated trade hits various levels. Always refer to the spreadsheet posted
here to see what levels are where. I think it is self-evident the order as presented. It is interesting
and critical to think about how a market can go from one point to another. The possibilities are nearly
endless and two traders can fail miserably or succeed beyond expectation by predicting the market
will move from here to there, but be right or wrong on how it goes there--think about it!

http://farm9.staticflickr.com/8052/8...696d9fda_b.jpg

Now for the charts and there are a few. All are EURUSD 1min of varying scale depending on the size
and time for the move. I have attempted to put them in order. Blue was overnight (for me) and the rest
except Silver were during main London-NY overlap. Silver was late in the day when I was surprised to
still see markets moving even for a Friday afternoon.

Blue
http://farm9.staticflickr.com/8211/8...8d4f081e_h.jpg
Lime
http://farm9.staticflickr.com/8051/8...08907114_h.jpg
Pink
http://farm9.staticflickr.com/8367/8...70ee0ed7_h.jpg
Aqua
http://farm9.staticflickr.com/8355/8...5776c108_h.jpg


Still a couple issues with the EA to work out. MetaTrader and its scripting language is not
the best, but does have reasonable power. Just takes some hacking to get everything
to work right.

Again, no analyzing, no critiquing, just gathering data. N = 8 trades is probably excessive
for the day, but keeping up such volume will create a stronger population from which
statistics may be drawn.

Have a good weekend, see you Sunday/Monday!
Back at it after recuperating from Super Bowl Sunday festivities!

But then almost quit again after my crappy ass broker decided to start denying trades due to 'hedging'. What a crock, the changes both by this broker and the over-regulation of Forex in general is about to drive me away. But I suffer on...

I have a couple trades still in progress (Orange and Pink), but wanted to use a few spare minutes to get posted before I forget or get busy.

Results (spreadsheet)--
http://farm9.staticflickr.com/8375/8...1656410d_b.jpg

And for the charts (hopefully in order)--

White EURUSD 1min--
http://farm9.staticflickr.com/8334/8...df9f53c7_h.jpg

Yellow EURUSD 1min--
http://farm9.staticflickr.com/8364/8...022c9be7_h.jpg

Red EURUSD 1min--
http://farm9.staticflickr.com/8228/8...c19dad1c_h.jpg
  • Post #17
  • Quote
  • Edited at 5:26pm Feb 5, 2013 4:51pm | Edited at 5:26pm
Continued--


Magenta EURUSD 1min--
http://farm9.staticflickr.com/8336/8...36bd471c_b.jpg

Skyblue EURUSD 1min--
http://farm9.staticflickr.com/8090/8...575fc1c1_h.jpg

Update--Pink EURUSD 1min hits target--
http://farm9.staticflickr.com/8095/8...b6d94373_h.jpg

Still more to come, not even to 20% of my desired number of trades
More trades, more data, pressing on. Again, I have 3 trades still in progress. Exploring longer
term trades, so this will likely be common. In short, I have been keen on identifying nice,
orderly waves on all time-frames and allowing them to move to target or stop loss without
interference from me. Plus I can trade 'inside' longer patterns both with and against the
directionality of that longer pattern.

Ledger--
http://farm9.staticflickr.com/8368/8...8d6762bd_b.jpg

Orange EURUSD 1min (carry over from yesterday, 14 hour trade)--
http://farm9.staticflickr.com/8237/8...94ec96c2_b.jpg

Lime EURUSD 15min--
http://farm9.staticflickr.com/8090/8...8b0d2520_h.jpg

White EURUSD 1min--
http://farm9.staticflickr.com/8092/8...d6af50f4_b.jpg

Silver EURUSD 1min--
http://farm9.staticflickr.com/8229/8...78552a11_h.jpg

DarkViolet EURUSD 1min--
http://farm9.staticflickr.com/8517/8...5e2881b4_h.jpg

More to come as trades complete
Whole lotta trading going on, so I quit a little early to update the Journal
and also provide some preliminary stats given I am 30 trades in.

Like yesterday, there were some longer time-frame trades and more 1min
trades as well. The key today, was to identify the trend-like move after
Europe news and just not take longs. Lie and wait, moves like this would
have destroyed me in the past, as I would try to catch every little bounce
thinking it was the bottom. Not this time.

February 7th, 2013 Ledger (with some 6th trades completed)--
http://farm9.staticflickr.com/8531/8...2e10a6f6_b.jpg

Plum15 EURUSD 15min--
http://farm9.staticflickr.com/8250/8...df9489c4_h.jpg

Magenta5 EURUSD 5min--
http://farm9.staticflickr.com/8388/8...b47b5edb_b.jpg

Red EURUSD 1min--
http://farm9.staticflickr.com/8366/8...c13d1804_h.jpg

DarkGray (6th) 1min--
http://farm9.staticflickr.com/8514/8...cfa2cb6c_h.jpg
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