ABCD pattern trading Guideline (PDF)
The ABCD pattern exists in forex trading with powerful bullish and bearish patterns that follow the actual price evolution to come up with a prediction of future price direction. Furthermore, this pattern appears frequently and is considered one of the most accurate patterns of all time. However, detecting this pattern requires a sharp trader with a keen eye for details. Because a lot of similar fake patterns that resemble the ABCD chart pattern do exist and could mislead forex traders.
ABCD patterns Guide
What is ABCD pattern in trading?
The ABCD Pattern also known as the AB=CD pattern is a harmonic pattern that follows the price movements of an asset. Thus, the pattern detects any signs of a potential reversal in the current trend. The pattern contains 3 successive price swings that bind 4 points to each other. The 3 swings could be up-down-up in a Bearish ABCD Pattern or down-up-down in a Bullish ABCD Pattern trading case. Furthermore, the pattern could appear in any asset chart including commodities, stocks, cryptocurrencies, or even derivatives. A useful pattern that appears in any timeframe chart. Yet, it’s best used on a 1 min chart because it shows if any break at point B or C occurs. In other words, it shows consolidation in detail. In addition to this, a 1 min chart contains up to 14 candles whereas a 5 min chart or more contains only 5 candles.
How to read it ?
The name of the pattern was extracted from the 4 points A, B, C, and D. These 4 points represent the intersection points between the price of the asset and the support and resistance levels. In other words, each point represents a significant high or low on the chart in the consolidation period. Furthermore, the reason behind calling it AB=CD is that the distance between points AB shall be equal to the distance between CD.
As follows a trading example of a Bearish ABCD pattern, the prices consolidate between resistance level and support level. Once point D has formed. There is a high probability of a downtrend and traders should take the necessary precautions. Furthermore, the ABCD Pattern starts initially as a Flag Pattern, bear or bull depending on the trend.
Is ABCD pattern bullish or bearish?
There are two basic versions of ABCD patterns, the bullish formation, and its bearish counterparty. To explain, the ascending chart structure of the ABCD forex pattern is bearish. Whereas the descending version of the ABCD pattern is a bullish chart formation in forex trading. In short, as with any other harmonic pattern, ABCD formation exists in both bullish and bearish chart structures.
Bullish ABCD pattern illustration
The Bullish ABCD trading Pattern is a sign of a potential uptrend similar to the Quasimodo Pattern. It usually appears after a downtrend where prices have significantly fallen. This descending chart formation is hard to detect until a certain maturity point.
Descending Chart Example
Professionals state that Points A to B constitutes a random downtrend. The Downtrend should contain between 2 to 4 candles, preferably all bearish. However, once detected, the trader should look for an uptrend: bounding points B and C. The distance must be short, shorter than the distance between AB. The BC move constitutes a rally against the ongoing decrease in prices. Point C shall not go up above point A. Thus, point C is going to be used as a resistance level. Furthermore, the price movement between points C and D is similar to the price movement between points A and B. A downtrend in the case of a Bullish ABCD Pattern.
Once the pattern is completed, the trader should stay alert and observe the market. The price should have reached a new lower low at point D. However, it should start to increase until it breaks through the resistance level. (the highest price recorded on point C.)
Please note that the Bullish ABCD Pattern should appear below the 9 Exponential moving average.
Bearish ABCD pattern illustration
The Bearish ABCD trading Pattern is a sign of an upcoming downtrend. It has similar characteristics to the bullish ABCD but the chart formation is ascending.
Ascending Chart Example
The Bearish ABCD Pattern comes after an uptrend. It all starts with a random jump in prices during the uptrend. That establishes the AB. A remarkable price increase creates a new higher high. Things start to change from here on. The BC will appear directly as a downtrend, but in terms of the period, it will be shorter than the AB. Then followed by the CD, a similar line and almost identical to the AB line, in terms of direction and length. Furthermore, Point C will be considered as the support level. In other for the downtrend to start, this support level should get broken through. In addition, point D will also be considered a new record, it’s the new highest high of the period. Price would start to decrease after point D until it crosses the support level at point C. Announcing the start of the downtrend.
Please note that the Bearish ABCD Pattern should appear above the 9 Exponential moving average.
How do you use the ABCD pattern?
It is so basic to use the ABCD pattern in real trading positions. Because the harder issue is to identify the structure before trading it.
During an Uptrend
During an uptrend, the ABCD pattern indicates the end of that trend . At first, the pattern could never be detected, from points A to B, it’s simply a random movement in price. However, things start to get clear once points BC appears. There is a high probability that it’s an ABCD pattern but without any trading confirmation. Thus, no action shall be taken before the 4th point appears. The Appearance of Point D indicates the full formation of the pattern. A trader can either sell all the quantity of the asset that he holds or enter a short position. In other words, he can either lock in the highest possible profit from holding the asset until the pattern appearance date. Or he can benefit from the spread between the sell and buy price if he chooses to enter a short position.
During a Downtrend
During a downtrend, the ABCD Pattern appears as a sign of a potential upcoming uptrend. The same principle of trading applies to both forms of the pattern. Never take an action until the pattern is fully mature (Complete).
However, drawing a 9 EMA line on the chart once a sign of the pattern appears. The candles of the pattern should be placed below the MA line. Which will help in confirming the trend reversal. Once the pattern is complete, the trader could either enter a long position or he could speculate on the Asset. Speculating the asset could result in tons of money if well done because it’s during an uptrend.
Conclusion
The ABCD pattern is a harmonic trading pattern that tracks price movements. It contains 2 similar price movements bounded with another contrary movement. The Bullish Version helps traders in identifying possible entry points whereas the bearish version helps in detecting possible exit points. The Pattern is best observable under a 1min timeframe chart, however, it could be observed under tighter or wider timeframes. Note that a 9 EMA is generally used along the pattern to reduce the risk of fault.