What Is The ABCD Pattern & How To Trade With It

The ABCD pattern requires that the BC leg is between a 38.2% to 78.6% retracement of AB, ideally between 61.8% and 78.6%. This means that if you put a Fibonacci retracement tool at A and B, then C should be between 0.382 and 0.786. These price movements create the “zig-zag” or “lightning bolt” shapes.

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Common mistakes in ABCD pattern trading

Each turning point (A, B, C, and D) represents a significant high or significant low on a price chart. These points define three consecutive price swings, or trends, which make up each of the three pattern “legs.” These are referred to as the AB leg, the BC leg, and the CD leg. We recommend using these levels together with support and resistance you identify at the chart using various tools of technical analysis. Don’t forget to have a look at senior timeframes when you hunt for support and resistance levels. To trade using the ABCD pattern, you have to identify the indicator, conduct further research and then set your trading alerts. Remember that the chart pattern develops across different timeframes, and you’ll need to observe trading charts over the short, medium and long term as part of your research.

The reason is that it’s rooted in the Fibonacci sequence – a process that involves dividing one number by another in sequence as part of a pattern. Each part of the pattern is like Fibonacci numbers and represents short-term consolidation against the trend. Traders utilize the Fibonacci tool to find the pattern on the chart. To trade the bearish ABCD you can simply use the above rules in reverse, placing pending sell orders to anticipate a bearish breakout.

Most efficient Forex patterns: a complete guide

Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. Since each pattern has both bearish and bullish versions, they help identify opportunities to buy and sell. Bullish patterns help identify more significant opportunities to buy, and bearish patterns help identify higher selling opportunities. Fibonacci ratios aren’t just useful for identifying support and resistance levels. They also form the basis of some key chart patterns, including the ABCD. To take positions, traders wait for the pattern to complete, then go long or short at point D.

Bullish patterns help identify higher probability
opportunities to buy or go «long.» Bearish patterns help signal
opportunities to «short,» or sell. In fact, ABCD patterns are present across every market and every timeframe. The up-down movements seen in financial assets represent opportunities to identify and trade ABCD patterns.

Last but not least, you should analyze your results from time to time in order to understand better how to improve the situation. Without hard work, it is all but impossible to become a successful trader. Besides, it is desirable to place automatic stop-loss orders. Importantly, orders will be carried out once your loss reaches a certain level. First of all, you need to remember that even the most successful traders aren’t immune from challenges.

In an ideal ABCD case, from point D the price retraces back on itself towards C again. FXCM is a leading provider of online foreign exchange (FX) trading, CFD trading and related services. Trade your opinion of the world’s largest markets with low spreads and enhanced execution. The difference though is that everything will be upside down. Besides, you might decide which specific events should trigger a decision to buy or sell a stock.

Bullish ABCD Pattern Characteristics (buy at point D)

The authors also noted that the pattern was particularly useful in volatile markets. The ABCD pattern is a fairly simple harmonic pattern based on Fibonacci ratios. You can find it on the charts on your own, or with the help of special chart assistants and indicators. It should be tested on a demo account https://trading-market.org/ before being used in real trading. The harmonic pattern of movement can apply in different market conditions that follow both bullish and bearing swings. With us, you can use the ABCD pattern trading to speculate on the movement of markets like forex, indices, commodities and shares in the short-term.

• H.M. Gartley introduced Gartley patterns
  in his book «Profits in Stock Markets».
• The position is then accumulated if the bullish break develops as expected.
• Frankly, perhaps the most challenging part of using the ABCD trading pattern is to draw it on a price chart.
• The ABCD is a simple Harmonic pattern that can usually be identified easily.
• In terms of theory, this study adds to the growing body of literature on technical analysis and the use of chart patterns in Forex trading.
• Based on the table above, with slight deviations, we can open a buy position with the target point (TP 2) at point (D) level -1.27 of CB leg.

Last but not least, you need to open your position and monitor your trade. If the retracement of move BC is .382 of
move AB, then CD should be 1.618 extension of move BC. Consequently, if move BC
is .886 of move AB, then CD should extend 2.618 of move BC.

In this particular case if you had decided to stay in the trade for further profit, your decision would have been rewarded. On the way up, the price creates only higher bottoms, and doesn’t test any critical support areas, which bolsters our long position. Therefore, the best course of action is to hold the trade further until the price breaks one of its support levels.

If you see the pattern forming on a particular timeframe, you may check if there’s another on a higher timeframe. This is when the price movement comes close or breaks the risk level you set. Identifying the indicator on a price chart is the first step to opening your position. Multiday charts generally offer insight into the behaviour of stocks and markets over an extended period of time.

• Moreover, it is vital to determine the average size of your wins and losses.
• Once the price completes the CD price swing, there is a reversal and an increase in the price once the price touches point D.
• A trend is a direction in which the market or the price of an instrument is moving.
• The up-down movements seen in financial assets represent opportunities to identify and trade ABCD patterns.

If you decided to trade the USD/JPY further, you would experience another price impulse in the bullish direction. However, the results are not as profitable as in the previous example. Two weeks after the minimum target is completed, the price action creates a very big bearish candle which breaks an important support on the chart. We have marked this support with the yellow horizontal line on the image above. This creates a relatively strong sell signal on the chart and any long positions at this point become suspect.

But no worries, you don’t need to calculate the lines and Fibonacci ratios on your own. For all intents and purposes, the ABCD pattern may be used to trade trend and reversal strategies. However, many active traders choose to utilise the ABCD within the context of a trend-following gameplan. The pattern’s appearance is similar to a lightning bolt or sloped zig-zag . This time, we have the 4-hour USD/JPY Forex pair on the chart. The blue lines on the image outlines the pattern from point A to point D.

Once the price swing reaches point D,
it drops down further as a decrease in the price caused due to the reversal, once again. The ABCD pattern works in the trending markets, but it can give false signals in the ranging markets. Traders often mistook the price highs and lows with the ABCD pattern without determining its validity. Therefore, in the ranging markets, the use of momentum oscillators comes in handy.

It is built from the time of the last leg in the zone from 1.38CD up to 2.681CD. As I have already said in my previous training article, time zones mark the period of time, when a key point should be found. But even in such case we can not only avoid losses, but even make some profits. Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Many traders prefer to watch ‘hot’ sectors, with around-the-clock news coverage, and high peaks and low troughs. Before you get started, it’s important to note that the pattern can manifest on both bullish and bearish trajectories, depending on trader’s entry point. Each pattern leg is typically within a range of 3-13 bars/candles on any given timeframe, although patterns may be much larger than 13 periods on a given timeframe. Traders may interpret this as a sign to move to a larger timeframe in which the pattern does fit within this range to check for trend/Fibonacci convergence. All information on The Forex Geek website is for educational purposes only and is not intended to provide financial advice. Any statements about profits or income, expressed or implied, do not represent a guarantee.

It is identified through a
zig-zag pattern that starts at A, which extends to the price swing that we call B. The pattern is then followed by a reverse and rise in price, known as BC, which is
then reversed to a bearish move (CD), completing the pattern. Once the price completes the CD price swing, there is a reversal and an increase in the price once the price touches point D.

Using the ABCD pattern to identify potential trend reversals. Also the harmonic
pattern ends at a retracement of 0.786 from the point where the overall pattern
begins. Once you understand what the ABCD pattern is in trading, you can learn how to find it on the charts yourself. The easiest way is with the help of special tools – indicators or chart assistants, such as ZUP and Autochartist. I want to emphasize, that the use of only harmonic patterns alone without additional confirming indicators involves high risks. Now that we understand how to identify the ABCD stock and Forex pattern, we can start applying it to real price action.

A retracement in price is a pullback from a periodic high or low. Also referred to as a correction, a retracement is viewed relative to a prevailing trend and can occur on any time frame. In terms of the ABCD pattern, corrections are frequently measured in terms of Fibonacci retracements. The most commonly applied Fibonacci retracement levels in the ABCD pattern are 38.2% (0.382), 50.0% (0.50) and 61.8% (0.618).

You can put a Stop Loss in line with your risk management rules. Notice that a 61.8% retracement at the point C tends to result in the 161.8% projection of BC, while a 78.6% retracement at the C point will lead to the 127% projection. Stay on top of upcoming market-moving events with our customisable economic calendar. Following the initial drop from point A to B, the price rebounded to point C.