Successful traders are those who excel in technical analysis. The most important component in technical analysis is to continuously scan for patterns in the charts. As technical analysts are confident that market moves in patterns and that they are repetitive and thus trade able in identical fashion. The ABCD pattern is a reliable chart pattern and occurs frequently. The formation of this pattern is easy to identify and trade even for new forex technical traders. However, advanced forex traders can use the pattern and apply complex technical trading strategies. Moreover, the pattern can be defined mathematically so many software coders are able to scan and identify the ABCD pattern automatically and incorporate them in many auto trading software. However, identifying them manually will provide an edge to trade this pattern successfully.
The pattern occurs in all intraday chart time frames and daily, weekly and monthly charts. So technical forex traders can learn and apply them to trade various trading strategies including short term and long term trading. Moreover, the ABCD pattern forms the basis for many other chart patterns so once the trader is able to identify and trade the ABCD pattern it will be easy to trade other chart patterns too. The ABCD pattern is an independently tradable pattern as it provides the forex traders with Entry point, Stop loss and Take profit points. The ABCD pattern is a reversal chart pattern and allows the trader to BUY at low and SELL at high.
Also Read: Falling Wedge Pattern
Contents
- What Is The ABCD Pattern?
- Types of ABCD Pattern
- How To Trade – Bearish ABCD Pattern
- How To Trade – Bullish ABCD Pattern
- Limitations
- Conclusion
What Is The ABCD Pattern?
The pattern shows the price movements in a Zig Zag fashion and resembles a lightning bolt or an electricity symbol. The ABCD pattern consists of 4 reversal points namely A, B, C and D. Each of these points is associated with price movements in phases or legs from A to B, B to C and C to D. The trend completes once point D is reached and signals an entry point.
The phase AB is a progressive leg, followed by a corrective phase during the leg BC. The next phase CD is progressive and exceeds the BC leg. The point D is regarded as the best entry point for a reversal trade.
Types of ABCD Patterns
The ABCD pattern can be further classified in to BULLISH pattern and BEARISH pattern based on the potential BUY or SELL opportunity it provides.
Bullish ABCD Pattern
The Bullish ABCD pattern can be further divided into three types
Bullish AB=CD pattern.
Bullish Classic ABCD pattern.
Bullish ABCD Extension Pattern.
Bullish AB=CD Pattern
The Bullish AB=CD pattern is the simplest of the pattern and can be spotted easily by its shape. Here the price moves downwards in the AB leg with A being the higher point, and point B is the lowest point during the entire AB phase. Once Phase AB is completed look for BC, a corrective leg with B the lowest price and C the highest price during the entire BC move. Once the BC leg is completed the CD leg is another progressive phase. The important feature of this pattern is the length of AB will be equal to length of CB wave. The price should reverse from point D and the reversal should be confirmed using price action.
Bullish Classic ABCD Pattern
The Classic ABCD bullish pattern is similar to the AB=CD pattern. The important difference is the length of wave BC and CD. In this type of pattern the length of BC wave if measured should be 61.8% or 78.6% of the length of the AB wave. Also the length of CD wave should be equal to 127.2% or 161.8% of the BC wave. The relation between BC wave and other waves form the basis for this pattern.
Bullish ABCD Extension Chart Pattern
The Bullish ABCD extension chart pattern relates the length of AB and CD In this pattern length of CD is longer and is more than 127.2% or 161.8% of the AB wave. This pattern thus allows the price to make a longer final move before the price reversal occurs. Caution should be exercised to identify the reversal point D as price may continue to move extensively before reversing. So traders should apply price action, support resistance to confirm the reversal before placing a trade.
Bearish ABCD Chart Pattern
The Bearish ABCD chart pattern can be further classified as
Bearish AB=CD pattern.
Bearish Classic ABCD pattern.
Bearish ABCD Extension pattern.
Bearish AB=CD Chart pattern
The Bearish ABCD pattern is similar to its Bullish counterpart, except the reversal from point D will begin a bearish market trend. The relation between the length of AB and CD forms the basis of this chart pattern.
Bearish Classic ABCD Chart Pattern
This Classic ABCD pattern uses the Fibonacci ratio of 61.8 % , 78.6 % , 127.23 % and 161.8 % to measure the relation between the waves.
Bearish ABCD Extension Pattern
The Bearish ABCD extension chart pattern defines the relation between waves AB and CD in terms of Fibonacci ratio of 127.2% and 161.8%. As, this pattern occurs during the end of a strong Bullish trend, forex traders must exercise caution to confirm price reversal as the trend may continue for an extended period of time.
How To Trade – Bearish ABCD Pattern
As discussed earlier the ABCD chart pattern is a complete trade able pattern that provides the trader with the best entry price, take profit and stop loss. The above EURUSD H1 chart shows the trading setup of the BEARISH ABCD chart pattern. The price moved from A to B where A and B are the respective low and high during this phase. The further corrective movement ends at C and the wave CD progresses and moves till D and completes the ABCD pattern.
The best SELL entry price is at the completion of the pattern at point D. The stop loss can be placed above the swig high point D and the potential take profit point is the length of AD in either time or price or both. Ideally the time and price bothshould match the length of AD.
How To Trade – Bullish ABCD Pattern
The Bullish ABCD pattern can be traded similarly to the Bearish ABCD pattern. The pattern provides the best BUY entry position upon completion of the pattern. The best stop loss is below the swing low point D while the potential take profit point is the length of the wave AD in time and price or both. All the Bullish and Bearish patterns AB=CD , Classic ABCD and ABCD extension pattern can be traded in a similar way in terms of entry point , take profit and stop loss points. The basic difference between the patterns is the relation between the waves AB, BC and CD to each other. So once the forex traders have identified the pattern and the completion point D, trading them is easy and similar.
The best method to ensure a good entry point is to confirm the price reversal at point D using other indicators, presence of previously identified support and resistance levels or channels. The pattern provides a good risk to reward ratio upon successful execution though there may be times when the stop loss is hit repeatedly. However forex technical traders must keep ample price gap between the entry point and stop loss initially and adjust it further once the trend had indeed reversed and starts to unfold.
Limitations
The major failure of ABCD chart pattern is due o the forex trader’s ability to identify the pattern properly. The pattern uses Fibonacci ratios to identify the patterns, traders tend to ignore the Fibo levels or wait for the price to reverse exactly at the Fibo level of the pattern. But in real life forex trading conditions prices may not reverse at the exact point and will require a level of understanding by the forex trader to identify the waves and comp0letion point D.
During a trending market price may move extensively and take a bit longer to reach the completion point D and finally reverse. The reversals may be followed by fake price pushes, which in turn may hit the stops frequently.
Conclusion
The ABCD chart pattern with its variations forms the base for other chart patterns like the Pennants and Flags so forex traders should spend enough time to identify and locate them manually though the market offers ample software to plot them automatically. Though the ABCD patterns are prone to failures they provide a higher risk to reward ratio that offsets these failures. It should be emphasized that though point D can be measured and located, the price action hat confirms the reversal plays an essential role in this pattern.
Also Read: Rising Wedge Pattern
