But there is also a slightly less known, but equally effective Harmonic pattern called the ABCD pattern. The ABCD pattern is part of the well-known harmonic group of patterns.
The ABCD is considered the simplest harmonic pattern. One of the reasons for this is that it has significantly less requirements than most of the other harmonic setups.
In addition the ABCD formation is much easier to recognize on the price chart. The price action behavior of the ABCD pattern starts with price moving in new direction A which later creates an important swing level B , then retraces a portion of the A leg C , and finally resumes to take out the important swing created at B, and continues until it reaches a distance equivalent to AB D.
The idea is to be in the market early with a trading position just after the reversal of the CD move. The BC move then gets reversed into a new bearish move CD , which goes below the bottom created at point B. This is all shown on the sketch below: After the price completes the CD price move, we expect a reversal and a price increase. This is shown with the blue arrow on the chart.
The pattern begins with a bullish AB line, which gets reversed by a new bearish move BC. When you get these characteristics on the graph, you can expect the price to reverse again creating a new bearish run. The bearish potential of the pattern is shown with the blue arrow on the sketch above. And only when the CD leg reaches a distance equal to the AB leg, are we looking to initiate a trade. As you see, the bullish and the bearish ABCD patterns are a mirror image of each other.
Therefore, the same trading rules are applied to each of them, but in the opposite direction. As you see on the image above, BC should be At the same time, the AB and CD price moves should be of equal distance and take approximately the same time to develop.
It is a good idea for the novice Harmonic trader to start with the ABCD setup before moving to the more advanced Harmonic chart patterns like the Crab, Bat, or Butterfly to name a few.
Since it is a unique chart formation, it has its own set of rules for trading. If you learn how to implement this set of rules, you can expect to trade the ABCD chart pattern with a positive edge. At the same time, BC should be the Meanwhile AB should also equal CD in terms of time. After you confirm the pattern, you should enter the market at the moment when the price action during the CD move bounces from the You should initiate a trade in the direction of the bounce which is counter to the CD leg.
The illustration above depicts a bearish ABCD pattern. You should look to short when the CD move reaches the The same is in force with the bullish ABCD pattern. The difference though is that everything will be upside down. The proper location of your stop loss would be just beyond the price extreme formed at the end of the CD move.
This is the same sketch from above. This time, we have pointed the proper location of the stop loss order with the thick red line on the image. In other words, we open the trade with the emerging of the new trend. This means that our entry point and our stop loss order are very close to each other. The minimum target which you should pursue with your ABCD trading system is a price move which is equals to the CD leg in size. In this manner, the place where the CD move started emerging is your target.
Have a look at the example below: In other words, the price action which comes after CD should equal CD in size as shown on the sketch above. However, this is the minimum potential of the formation. In other words, the price could extend its move further and it would be to our advantage if we were to keep a portion of the trade open in order to catch a bigger move.
When you find the weight of evidence shifting in the opposite direction, you should close your trade with your realized profit. Now that we discussed the ABCD pattern and the associated trading rules, we will now combine all of these concepts into a complete ABCD trading strategy. The next most important step is to validate the pattern.
This means we must evaluate the BC leg and make certain that it is a At the same time, the AB leg should equal CD leg in terms of size and duration. If the pattern is bullish we can go long placing a stop loss below the D point. Then we should stay in the trade at least until the price reaches the level of point C. If the pattern is bearish, then we should short the Forex pair putting a stop loss order above point D. The pattern is displayed with the blue lines on the image.
The black horizontal lines and the black arrows correspond to the respective Fibonacci levels. See that AB is approximately equal to CD. Also, AB takes approximately the same time to develop as CD. BC is the Therefore, we confirm the validity of the ABCD formation on the chart.
In this manner, we expect that this valid ABCD pattern leads to a bullish price move. The CD move finishes in the area of the You should place your stop loss order below the lowest point of the CD swing as shown with the red thick line on the chart.
After a few tests of the A couple of weeks afterwards, the Cable price reaches the minimum target of the pattern. In other words, the price increases to the level of the C top. Here we would have two viable options — to either close the trade in full and to collect the realized profit, or close a portion of the trade and keep a portion open in order to catch a further price move.
In this particular case if you had decided to stay in the trade for further profit, your decision would have been rewarded.
Therefore, the best course of action is to hold the trade further until the price breaks one of its support levels. This would have provided an exit signal on this trade.
Notice that the minimum target of this ABCD pattern is only half of the total price move from this example. This shows why it is so important to try to ride a winning trade for as long as the market allows.
The Time frame covered is June — Aug, The image displays a bullish ABCD pattern. The blue lines on the image outlines the pattern from point A to point D. The black horizontal levels on the image and the two black arrows correspond to the respective Fibonacci levels and the directional shift in price after interacting with the levels. Move AB is approximately equal to move CD in terms of size and time to develop.
At the same time, BC retraces Therefore, we confirm the validity of the pattern. Once we realize the price bounce off the A few weeks after the long signal on the chart, the price action completes the minimum target of the bullish ABCD pattern. Again, we would face two viable options at this moment — to close the trade in full and collect the generated profit, or keep a portion of the position open and stay in the trade for a potential price increase.
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.
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