What Is an ABCD Pattern, and How Can You Use It in Trading?What Is an ABCD Pattern, and How Can You Use It in Trading?
Are you looking to improve your trading strategy and technical analysis skills? The ABCD trading pattern may be just what you need. This tool may help you identify potential market reversals and decide when to enter a trade. Keep reading to learn more about the ABCD pattern and how to apply it to your trading strategy.
What Is an ABCD Pattern?
The ABCD pattern is one of the basic harmonic patterns. It gives traders an idea of where the market might reverse. Therefore, when combined with other forms of technical analysis, it may be a great addition to your trading arsenal.
The ABCD pattern comprises two legs, AB and CD, and one retracement, BC, with D as an entry point. More specifically, an ABCD can be identified by:
- AB Leg: A trend starts at A and makes a high or low at B.
- BC Retracement: The price retraces from B to C.
- CD Leg: The trend continues from C to D.
- D Entry Point: Once another high or low forms and traders enter at D.
These price movements create the “zig-zag” or “lightning bolt” shapes.
In fact, ABCD patterns are present across every market and every timeframe. The up-down movements in financial assets represent opportunities to identify and trade ABCD patterns.
Why Use the ABCD Pattern in Your Trading Strategy?
Before we move on to identifying and trading the ABCD pattern, it’s worth explaining why you might want to consider using it. Here are a few reasons traders favour the ABCD pattern:
- It’s one of the harmonic patterns suitable for traders of all experience levels.
- It’s versatile and works for stocks, commodities, and cryptocurrencies*, not just forex trading.
- Traders use ABCD patterns to make informed decisions about potential turning points in the market.
- It can form the basis of a working trading strategy if used correctly alongside other forms of technical analysis.
- It provides quite an effective risk/reward ratio if reversals are caught.
How Traders Identify an ABCD Trading Pattern
The first step in finding ABCDs is to look for that classic zig-zag shape. Once you’ve found one, it’s time to apply Fibonacci ratios to confirm the pattern. If you’re struggling, you can consider using pre-made ABCD pattern indicators or scanners to help your eyes get used to spotting them.
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, C should be between 0.382 and 0.786.
The second CD leg should be a 127.2% to 161.8% extension of the BC retracement. For extra confirmation, consider specifying that AB is equal to the same length as CD.
While it can be tempting to start trading based on these conditions, you’ll find that, in practice, identifying point D can be trickier than it seems. That’s why traders typically use Fibonacci ratios, key levels, candlestick patterns, and higher timeframe convergence to confirm their entries, which we will touch on shortly.
ABCD Pattern Examples
Now that we understand how to identify the ABCD pattern, we can start applying it to real price action.
Note that the ratios won’t always be perfect, so allowing for slight variability above or below the defined ratios is acceptable.
Bullish ABCD Pattern
For a bullish formation, the following must be present:
- The AB leg should be between the high A and low B.
- The BC bullish retracement should be between the low B and high C, which is below the high A.
- The CD leg should be between the high C and low D.
- BC is a 38.2% to 78.6% retracement of AB, preferably between 61.8% and 78.6%.
- CD is a 127.2% to 161.8% extension of BC.
Additionally, you may look for AB to be an identical or similar length to CD.
Entry: Traders set a buy order at D.
Stop Loss: The theory suggests traders place a stop below a nearby support level or use a set number of pips.
Take profit: Traders place take-profit orders at the 38.2%, 50%, or 61.8% retracement of CD or hold for higher prices if they believe there’s the potential for further bullishness.
Bearish ABCD Pattern
The bearish ABCD chart pattern is essentially the same, just with the reversed highs and lows. As such:
- The AB leg should be between the low A and high B.
- The BC bullish retracement should be between the high B and low C.
- The CD leg should be between the low C and high D.
- BC is a 38.2% to 78.6% retracement of AB, preferably between 61.8% and 78.6%.
- CD is a 127.2% to 161.8% extension of BC.
You can choose to apply the same AB = CD rules in a bearish ABCD pattern if desired.
Entry: Traders typically place a sell order at D.
Stop Loss: A stop may be placed above a nearby resistance level or at a set number of pips.
Take profit: Traders often take profits at the 38.2%, 50%, or 61.8% retracement of CD or hold for lower prices if there’s a bearish trend on a higher timeframe.
ABCD Pattern Strategy
A momentum-based ABCD trading strategy can help traders confirm potential reversals by incorporating indicators like the RSI (Relative Strength Index). This approach often adds an extra layer of confluence.
Entry
- Traders may wait for point D to form and for the RSI to indicate overbought or oversold conditions, typically above 80 or below 20.
- Additional confirmation can be sought if there is a divergence between price and RSI, signalling weakening momentum.
- Once the RSI crosses back into normal territory, it can suggest a reversal, providing an opportunity to enter the market.
Stop Loss
- A stop loss is often placed slightly above or below point D, depending on whether the formation is bearish or bullish, respectively. This helps potentially manage risk in case the reversal doesn’t hold.
Take Profit
- Traders can consider taking profits at Fibonacci retracement levels of leg CD, such as 38.2%, 50%, or 61.8%.
- Another common target is point C, but traders may also hold the position for longer if further price movement is anticipated.
Looking for Additional Confluence
Given that trading the ABCDs usually relies on setting orders at specific reversal points, consider looking for extra confirmation to filter potential losing trades. Below, you’ll find three factors of confluence you can use to confirm your entries.
Key Levels
If your analysis shows that D is projected to be in an area of significant support or resistance, there’s a greater chance that the level will hold and the price will reverse in the way you expect.
ABCD Timeframe Convergence
One technique to potentially enhance the reliability of ABCD chart patterns is to check for multiple timeframes. When you identify the formation on a lower timeframe—say, the 5-minute chart—you can then look to a higher timeframe chart, such as the 30-minute or 1-hour chart to see the overall trend.
If the pattern converges with the longer-term trend, it strengthens the analysis and increases the likelihood of an effective trade.
Candlestick Patterns
Some traders look for particular candlestick patterns to appear. The hammer and shooting star patterns are commonly used by ABCD traders for extra confirmation, as are tweezer tops/bottoms and engulfing candles. You could choose to wait for one of these candlesticks to form before entering with a market order.
Common Mistakes to Avoid When Identifying an ABCD Chart Pattern
Of course, ABCD patterns aren’t a silver bullet when it comes to effective trading. There are several common mistakes made by inexperienced traders when trading these types of patterns, such as:
- Confusing the ABCD with other harmonic patterns, like the Gartley or three-drive pattern.
- Trading every potential ABCD formation they see. It’s preferable to be selective with entries and look for confirmation.
- Not being patient. ABCDs on higher timeframes can take days, even weeks, to play out.
Experienced traders wait for the pattern to develop before making a trading decision.
- Ignoring key levels. Instead, you could allow them to guide your trades and look for the ABCD pattern in these areas.
The Bottom Line
The ABCD pattern is a versatile tool that can enhance a trader’s ability to identify potential market reversals and refine their overall strategy. When combined with other forms of technical analysis, such as momentum indicators, an ABCD trading strategy can be an invaluable addition to your trading arsenal.
For traders looking to apply the ABCD pattern in forex, stock, commodity, and crypto* markets, consider opening an FXOpen account and take advantage of low-cost, high-speed trading across more than 600 assets. Good luck!
FAQ
What Is an ABCD Trading Pattern?
The ABCD trading pattern is a simple harmonic pattern used by traders to identify potential market reversals. It consists of three price movements: the AB leg, BC retracement, and CD leg, with point D marking a potential entry for a reversal trade. It helps identify changes in trend direction.
How Can You Use the ABCD Pattern in Trading?
Traders identify the ABCD pattern by finding the characteristic zig-zag shape and using Fibonacci ratios to confirm it. Entry points are typically placed at point D, with stop losses and profit targets based on the formation’s structure. Confluence with other technical analysis tools improves its reliability.
Is the ABCD Pattern Bearish or Bullish?
The ABCD pattern can be either bearish or bullish. A bullish ABCD indicates a potential upward reversal, while a bearish ABCD suggests a downward reversal. The structure remains the same, but the highs and lows are reversed.
What Is the ABCD Strategy?
The ABCD strategy revolves around identifying trend reversals using the formation and confirming entry points through tools like Fibonacci retracements or momentum indicators like the RSI for added accuracy.
*At FXOpen UK, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules. They are not available for trading by Retail clients.
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Bearish AB=CD
ANTICIPATING TRADES BY APPLYING TRADING STRETEGYAnalysis of USDCAD Forex pair carried out on 12 Sep 2024 by applying following trade strategy:-
1. Bullish trend
2. Bearish Divergence
3. No continuation pattern
4. Double Top reversal pattern formed
5. Bearish Harmonics pattern AB=CD pattern formed and chart near point D, PRZ
6. Anticipated that chart will go bullish by making LHs & LLs
7. Initiated two trades on MT4 by marking sell stop on break out of LL and stop loss at HH as still no LH is formed
USDJPY Analysis and Trade OpportunitiesLike I mentioned in our weekend live session, I don't see any BOJ intervention happening soon.
The earliest I’m looking is when the market reaches 158.73, with the next level at 159.66.
Around 157.74 is the level I'll be looking for a buying opportunity using the existing strategy that I've used for many years.
Key Levels:
Potential Intervention Levels :
- 158.73
- 159.66
- Buying Opportunity : Around 157.74
Shorting Opportunities :
1-Hourly Chart :
- Bearish Bat Pattern Completion : 158.15
- ABCD Pattern Completion : 158.39 if the Bearish Bat Pattern does not complete
Strategy :
- Buying at 157.74 : Use the tried and tested strategy that has worked over the years.
- Shorting Opportunities : Monitor the 1-hourly chart for potential Bearish Bat Pattern at 158.15 and ABCD Pattern at 158.39.
What’s your trade plan for USDJPY? Any valuable insights you’d like to share? Comment down below.
The Duality of PatternsEURJPY presents an interesting scenario with a potential combo trade, or is it? Let's break it down:
1. 4-Hourly Bearish ABCD Pattern:
- Retest completion at 161.74.
2. Daily Bearish Bat Pattern:
- Completion at 162.55.
Two patterns, two different starting points. Is it a combo or a dual setup?
Share your thoughts and let's navigate this intriguing trade opportunity together!
NVDA: Bearish ABCD above the Trading Range Targeting $272.42NVDA has risen above the trading range but has started to print weaker Bearish candlestick patterns on the Daily as it approached the PCZ of a potential Bearish ABCD pattern. At this point in time it seems like NVDA will fall short of $600 then come back down to its last official support level which was at $272.42, if 272.42 doesn't hold then it could go into the one hundreds or even below $100 to around $80 but $272.42 is the main target.
Diverse Trading Scenarios ExplainedGBPUSD is on a Weaker Bull Trading setup, if you are looking for buying opportunity there are 2 trading opportunities for you.
The Bullish Shark Pattern may form on the daily chart at 1.2343, alternative you could wait for a retest of support at 1.2559 on the 1-hourly chart.
If you are looking for counter-trend trading opportunity, the 1-hourly chart do have a bearish abcd pattern that is completing at 1.2651.
What is your trading strategy, comment down below.
Navigating A Weaker Bull Trend For Strategic TradingIt appears EURUSD is currently within a Weaker Bull Trading setup.
For trend traders, waiting for a counter-trend opportunity might be a potential strategy.
Counter-Trend Traders, here are two considerations for your approach:
As the market resides in the supply zone on the Daily Chart, waiting for a double top formation coupled with RSI Divergence could offer an entry point for your trade.
Alternatively, keep an eye out for an ABCD Pattern as it unfolds, presenting another counter-trend trading setup.
These strategies aim to navigate against the prevailing trend, so it's essential to apply rigorous risk management practices.
Happy trading!
Stellantis: Bearish ABCD with Multiple Monthly ConfirmationsStellantis: The Nvidia of Autos has formed a Bearish ABCD that is visible on the Monthly Timeframe with MACD Bearish Divergence and Bearish PPO Confirmation. If this plays out, we could see this go towards the C level, which aligns with the 0.786 retrace at €4.48
NVDA: Monthly Bearish ABCD Signal Pending Lowering Target to $80Last month I posted a setup that made the argument that NVDA was trading within the Pattern Completion Zone of a Bearish ABCD visible on the Monthly Timeframe and that all I was looking for was a Monthly PPO Confirmation Signal which would likely be triggered by a Bearish Negative Monthly Candle within the Zone; this situation remains the same we are still trading within the zone even after the earnings pop, but we simply haven't had that negative month yet, however it does seem like it will soon give me the signal that I want and it's something to pay attention to, at this point I'd say it'd be ok to put on a midsized bearish entry via 1-3 month NVDA Puts around the $480-$500 strike or NVDS Calls at the $36 strike and upon generating the bearish negative signal candle it will be appropriate to put on the full bearish entry.
In addition, after the recent Price Action and Earnings, if we do get the signals we want here, NVDA will probably drop back down to around $80
The original setup can be found below:
Overall Bullish, But I'm Countertrending This Trade💹 GBPUSD is currently experiencing an overall bullish trend, as evident from the Weekly Chart (right) showing bullish movement within the Buy Zone.
⛔️ However, as a Counter-Trend Trader, I'm eyeing a potential shorting opportunity on GBPUSD based on the setup on the daily chart.
🔍 My trading approach will shift to bullish once it hits the key support level or the bullish trendline.
📊 Stay tuned for more trading insights and updates!
BTC Bearish ABCD Setting up to Drop Down Towards $16,741Recently, BTC has been showing promise to begin a macro breakout and run up to over $100,000, but even more recently on the lower timeframes, it's been giving off some bearish signs at a Bearish ABCD PCZ that we could actually go back down to around $16.75k from here before actually beginning the true run up towards the 6 digits.
We have made three Consecutive Lower Highs on the RSI and are likely setting up for a Double Bearish Divergence on the MACD; if we come back down to test the levels of 16.7k, that would be the secondary test of the 1.618 Butterfly PCZ to which we could then more confidentially rise from.
Counter-Trend MoveThis could be for you if you are waiting for a counter-trend move. A Bearish Gartley Pattern is expected to complete at 1.2605, but the earliest for that is on 12 Jun 23, 1200(utc+3); any earlier than that, the trade would be invalid.
If a break and close above 1.2605 occur, I will wait for an M.C confirmation at 1.2659 on the ABCD pattern.
Both of these Harmonic Patterns are counter-trend moves. On GBPUSD, that means a pullback trade. Overall, my sentiment remains bullish on the GBPUSD.
AmerisourceBergen Corporation: Bearish AB=CD & 3 Drives PatternABC currently is Bearishly Diverging on the MACD and RSI around the 2.414-2.618 PCZ of a Bearish AB=CD where it has also developed a Bearish 3 Drives Pattern and a Bearish Shark. If we get the action I'm expecting to see from here, it will come down and break through the trend line and then continue down to the 0.886 retrace at $77 in a dramatic way.
USDT Dominance Looking to Decline to 6% and BelowUSDT Dominance is trading within a Rising Wedge pattern and within said Wedge it has formed a Perfect Bearish ABCD leading to the Top of the Rising Wedge and the 78.6% Fibonacci Retrace of the Range.
In time we could see the falling wedge breakdown from here and continue the macro downtrend below 6%
Trading Speed Bump Ahead!!Looking ahead, the EURJPY is poised to be the most trending pair in the coming week, with a bullish Euro and bearish Yen driving the market. This presents a great opportunity for trend traders, as the pair is expected to rise steadily.
Personally, I will be watching for a retest of 149.53 on the 1-hourly chart as an entry point for a trend-continuation trade.
However, it is important to note that a potential trading speed bump may arise on the daily chart due to the completion of a bearish AB=CD pattern at 150.76.
While this may be a cause for concern, experienced traders will set an alert at 150.76 and wait for a confirmation signal before acting on the pattern. It's important not to let "what-if" scenarios deter you from making a trade - stick to your trading rules and use them to your advantage.
I want an Upsize pleaseAn Upsize Trade is the name of 1 of my trade management.
On the 4-hourly chart(left) is a complete ABCD pattern. I'm waiting for a retest at 158.98 for a buying opportunity.
When the retest happens, I'll be stretching my final target to the Bearish Bat and Bearish ABCD Pattern which completes at 168.11.
This is a high-risk approach and it could harm your account if you do not know how to execute it the right way.
$EDU: Bearsh ABCD into Bearish ABCD BAMM with 98% DownsideThis stock looks like it's setting up to lose pretty much all of it's current value below the moving averages and the Bearish ABCD with Bearish Divergence along with Hidden Bearish Divergence on the Weekly. There's also the terrible Earnings and there's just no justifying how bad it is. If this Bearish ABCD plays out then i'd expect an ABCD BAMM Movement down to around $0.75 i'll play it via long-dated puts.