Dear Traders,
Have you ever thought about what financial
trading can add to our lives? For instance, it can be a great way to reach our
financial goals. There are many tools available to help you make the right
decisions and manage your risks in financial trading. One of these tools is
technical analysis models known as harmonic patterns. By using these patterns,
we can take advantage of the opportunities offered by the markets with accurate
analyses. In today's article, we will take a closer look at one of the most
basic and common examples of harmonic patterns, the "ABCD Pattern."
We will explore what the ABCD Pattern is, how it works, its different types,
and its use in trading with examples.
What is the ABCD Pattern?
The ABCD pattern is a technical analysis tool that falls
into the category of harmonic patterns. It is one of the most effective tools
for identifying trend reversals in financial markets. It can be observed in
both bullish and bearish markets. There are different types of ABCD patterns,
and the following variations are more prominent in the market:
1. Classic ABCD Pattern:
It is a chart pattern consisting of four main points (A, B,
C, and D) based on certain Fibonacci levels. The A-B move usually corresponds
to the 61.8% or 78.6% Fibonacci retracement level of the C-D move. The C-D
move, on the other hand, is an extension of 127.2% or 161.8% of the A-B move.
2. AB=CD Pattern:
It is one of the simplest harmonic patterns. In this
pattern, the length of the A-B move is equal to the length of the C-D move (AB
= CD). A-B and C-D should be of equal length and are usually symmetrical. The
B-C move corresponds to the 61.8% or 78.6% Fibonacci retracement level of the
A-B move. Sometimes, the equality in the time frame of the A-B and C-D moves,
meaning their formation occurring within the same time frame, is also taken
into consideration (Time of AB = Time of CD).
3. ABCD Extension Pattern:
The ABCD Extension pattern is an extended version of the
classic ABCD pattern. The A-B move is an extension of 127.2% or 161.8% of the
C-D move. In this pattern, the C-D move exceeds the length of the A-B move and
has a larger extension. This implies that prices make a larger impulsive move.
In addition to the variations of the ABCD pattern listed
above, there are two main types known as Bullish ABCD and Bearish ABCD
patterns. These main types of the pattern are named as such because they
determine the future price direction.
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| The Different Types of ABCD Pattern |
How is the ABCD Pattern Formed?
The ABCD pattern consists of four main points labeled A, B,
C, and D. These points combine the upward and downward movements of prices. It
creates a harmonic structure on the charts using Fibonacci retracement levels.
The Bullish ABCD pattern indicates the beginning of a bullish trend, while the
Bearish ABCD pattern signifies the start of a bearish trend.
Formation of the Bullish ABCD Pattern:
A to B Move: Known as the initial move where prices decline.
B to C Move: Formed as a corrective move where prices
recover slightly. It usually corresponds to 38.2% to 61.8% of the AB leg.
C to D Move: Formed as prices decline again and create a new
low at point D. Point D is typically a 127.2% or 161.8% Fibonacci extension of
the A-B move.
Formation of the Bearish ABCD Pattern:
A to B Move: Defined as the initial move where prices rise.
B to C Move: A corrective move where prices decline for a
short period. This retracement usually corresponds to 38.2% to 61.8% of the AB
leg.
C to D Move: Formed as prices rise again and create a new
high at point D. Point D is typically a 127.2% or 161.8% Fibonacci extension of
the A-B move.
How to Trade the ABCD Pattern?
The ABCD pattern in financial markets is one of the most
basic and frequently used tools for analyzing price movements and predicting
future price changes. This pattern provides important clues about price
reversals by indicating that an upward or downward trend in the market is
approaching. Different trading strategies can be applied depending on whether
it is a bullish or bearish market. Also, other technical analysis tools and
indicators can be used to increase the reliability of the signals provided by the
pattern.
With the formation of the Bullish ABCD pattern, it is
anticipated that prices will start to rise, and a long position is opened based
on this anticipation.
Buy (Long): The completion of the ABCD pattern and the
upward breakout of prices from point D is the most suitable signal for buying.
Stop Loss: The Stop Loss order is usually placed slightly
below point D.
Target: A level close to point A can be set as the target
price, with the expectation that prices will rise to point A.
The visual below shows a Bullish ABCD pattern observed in
the 4-hour price movements of the Euro/Canadian Dollar (EUR/CAD) pair,
indicating a buy signal:
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| The Bullish ABCD Pattern on the EUR/CAD. |
When the Bearish ABCD pattern is observed, a short position
can be opened with the expectation that prices will start to decline.
Sell (Short): A sell order can be placed after prices break
downwards from point D.
Stop Loss: The Stop Loss order is usually set slightly above
point D.
Target: When determining target prices, Fibonacci
retracement levels or other technical analysis tools can also be used.
The visual below shows a Bearish ABCD pattern observed in
the 4-hour chart of the New Zealand Dollar/US Dollar (NZD/USD) pair, following
a specific harmonic pattern in price movements and presenting an attractive
selling opportunity:
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| The Bearish ABCD Pattern on the NZD/USD. |
Pay attention: Forex is a market with high risks. No pattern provides a 100% reliable signal on its own, and the ABCD pattern is no exception to this rule. Therefore, it is essential to consider other technical analysis tools and indicators as well.