Those who have studied harmonic patterns would be aware of the highly effective ABCD pattern. Though it is not as popular as some other patterns of the harmonic trader’s collection, it is still very much used in personal trading programs. In this article, we look at the AB=CD model and show how you can best use it.
What Is The ABCD Pattern?
The ABCD stock pattern is also much easier to identify on the price chart. Let's take a look at what such a model looks like.As you can see from the ABCD chart, the pattern begins moving in the direction A and later creates a crucial swing level at B. It then outlines a portion of leg A at C, resumes to go beyond the swing at B, and continues onward until it has covered a distance that is equivalent to AB at D. When the last led (CD) has reached a distance equivalent to AB, one can anticipate the CD price to reverse.
When the ABCD pattern is established, traders will mark entry points right after the CD move at the beginning of the expectant reversal. The trader should be in the market with the trading position early soon after the CD reversal move.
Bullish ABCD Pattern Characteristics (buy at point D)
The bullish AB=CD pattern begins with a decrease in price (AB), which is followed by a reversal (BC). After that, the BC reveres into a new move (CD). This goes below point B, as shown in the sketch above. This is the classic AB=CD pattern. Once the CD price move is completed, we can expect a reversal and an increase, as is shown with the blue arrow.
Bullish ABCD Pattern Rules
Hereunder, you will find the bullish ABCD pattern rules:
- Look for AB: Point A should be significantly higher than Point B. In the A to B price move, there cannot be any highs above A, nor any lows below B.
- When AB, look for BC: Point C has to be lower than A. In the B to C price move, there cannot be any lows beyond B or any highs above C. Ideally, point C will be at 61.8% or 78.6% of AB.
- When BC, draw CD: Point D should be lower than B. In the C to D price move, there cannot be any highs above C, nor any lows below D. Next, find out where D may complete in terms of price, and in terms of time. Find out the fib, pattern, and trend junction.
- Look for any gaps in price, broad-ranging bars in CD, primarily when the market draws nearer to point D.
Bearish ABCD Pattern Characteristics (sell at point D)
The chart pattern for bearish ABCD is the same as the previous pattern, except it is the reverse ABCD pattern. The design starts with an increase in price (AB) and reverses to a new move (BC). Next, this move reverses further to a new move (CD) and goes beyond the top of point B. Once you get such characteristics on a graph, you can anticipate the price to reverse again.
The potential of the bearish pattern is highlighted by the blue arrow in the image above. Note that there are basically three price moves before the pattern is confirmed, that of AB, BC, and CD leg. One should look to initiate trade only when the CD reaches the distance equal to AB.
Bearish ABCD Pattern Rules
Hereunder, you will find the bearish ABCD technical analysis:
- Look for AB: Point A should be significantly low while B high. In the A to B price move, there can be no lows beyond point A, nor any highs beyond B;
- When AB, look for BC: C has to be higher than A. In the B to C price move, there can be no highs beyond B, nor any lows beyond C, which should be at 61.8% or 78.6% of AB;
- When BC, look for CD: D has to be higher than B. In the C to D price move, there shouldn’t be lows beyond C, or any highs above D. Find out where D may complete in terms of price and time. Find out fib, pattern, and trend junction;
- Look for any gaps in price, broad-ranging bars in CD, especially when the market draws near to D.
- BC leg is precisely 61.8% Fibonacci retracement of AB leg.
- CD leg is exactly 127.2% Fibonacci expansion of BC leg.
It is imperative to confirm the Fibonacci levels whenever you are looking at the ABCD stock chart pattern.
As mentioned above, if you observe the price movement making the ABCD pattern with the swings adhering to the Fibonacci ratios, you can assume that there are high-probability trading patterns on the chart.
ABCD Trading System
As the setup is in a specific ABCD stock chart pattern, it has its own unique trading rules. You must learn to implement the rules, for you can trade with some advantage if you do. Go through the following sections that outline some of these rules.
ABCD Entry Point
Before entering the market on the ABCD chart pattern, you should first confirm the validity of the pattern. This means you have to look for the equal-sized price swings (AB=CD). At the same time, they should adhere to the Fibonacci ratio. The two sides of the equation, AB and CD, should also be equal in terms of time.
Once you have the pattern, enter the market when the price movement CD bounces from the 127.2% extension of BC. Start a trade in the direction of the bounce.
ABCD Stop Loss
It is essential to set a stop-loss order when you open a position based on the ABCD signal to protect yourself from unexpected price moves against the trade. The ideal location for this should be a little above the price extreme at the end of the CD leg.
Since the ABCD pattern provides the opportunity to trade a reversal in price from the beginning, we open the trade based on the emerging trend. This means that the stop-loss order and the entry point are quite close to each other. In this way, the ABCD pattern forex strategy has an alluring win-loss ratio.
ABCD Take Profit
The minimum aim that you should chase is a price move that is equal in size to the CD leg. This way, the area where the CD starts to emerge is your aim. Let us consider the example below:
The price move that is projected to come after CD ought to reach a full Fibonacci retracement of CD. This means that the action coming after CD should be equal in size to a CD. However, this is only the minimum target, and the price can possibly extend. Then, it would be to one’s advantage if one keeps some portion of the trade open to as to catch the extended move.
One can, once the price completes the minimum target, close half of the position size and keeps the other half in the trade so as they ride the extended momentum. It is essential to look out for price action clues using candle formations, chart patterns, and trend lines as soon as the trend shifts in the opposite direction, close the trade with your profit.
Trading the ABCD Setup
Now, let us combine all the concepts into a comprehensive ABCD chart stock strategy. First, we identify and validate the pattern based on the Fibonacci ratios, and see that AB and CD legs are equal in size and duration.
If there is a bullish pattern, we can place a stop loss below D and should stay in the trade until the price reaches point C. If it is a bearish pattern, put a stop-loss order above D and short the Forex pair. Stay in trade until the price reaches point C. If you like this strategy, you might also be interested in this The Master Candle
ABCD is quite a popular trading pattern. It is quite straightforward to recognize and validate, and even to trade. Such a pattern is frequently observed in the market. Traders can pair it with various other technical analyses to increase the odds of their trades.
Remember to obey the rules of the game, or else it might get challenging for you to make profits with trading. We hope you now have a basic understanding of this strategy. There are various charts available for you to see how ABCD can be used as the forex master pattern.