Today we will discuss the details of ABCD harmonic pattern in the forex market, including how you can make a good profit using this price pattern.
As we know, the harmonic trading tool is similar to the price action patterns in the financial market, and many professional traders use it.
Like a Butterfly harmonic pattern or Gartley pattern, ABCD pattern works as a potential market reversal indicator.
Before moving further about the ABCD pattern trading strategy, let’s move to what the ABCD pattern is and how we can spot it is the price chart.
ABCD Pattern in the Forex Market
ABCD Pattern is very similar to the other harmonic trading tools in the market, and it is straightforward to identify.
In the forex market, it is essential to know when the price may reverse. Both counters-trend trader and trend continuation trader need to know the potential market reversal zone so that they can enter a trade or manage the current running trade.
In every financial market, a bullish impulsive has some bearish correction, and bearish impulsive has a bullish correction. So, trading against the correction means trading towards the trend.
On the other hand, trading against the primary trend is solid counter-trend trading. This is how we can trade both continuation and reversal trade using the ABCD pattern.
Let’ have a look at how the ABCD pattern forms in the market.
How ABCD pattern Forms
AB and CD move against the market direction where BC is the minor correction after the AB leg.
Let’s have a look at how the ABCD pattern looks like:
- AB Leg- As we can see in the image above, the AB leg appears after a bullish trend and creates a new lower low against the market direction.
- BC Leg- The BC leg is the correction of the first AB leg. Therefore, point C should be within the AB leg. If point C moves above or below the AB leg, the ABCD pattern will be invalid. Furthermore, the BC leg should be corrective compared to the movement of the AB leg. The BC leg can move 38.2% to 78.6%Fibonacci retracement levels of the AB leg. However, The ideal retracement level is 61.8% to 78.6% Fibonacci levels.
- CD Leg- CD is the final leg of the ABCD pattern, which is the final try of the counter-trend traders. The CD leg should be similar to the AB leg. However, the size can differ a bit due to the market volatility and available price. Furthermore, point D will represent 127.0% to 161.8% Fibonacci extension level of the BC leg. Point D is the entry point from where the market is likely to reverse.
In the ABCD pattern, the AB leg might not be similar to the BC leg every time. Due to market volatility, the price might create new highs and lows.
However, it is important to see how the price reverses from the low and high of the AB leg.
In the following section, we will see a trading strategy using the ABCD pattern in both bullish and bearish market.
Bullish ABCD Trading Strategy
In ABCD pattern trading, it is essential to read the price from the AB leg to CD leg. The AB and CD leg should be bearish for the bullish trading entry, and point D will be the entry point.
- Entry- Observe the price and identify the point D. Enter the trade after a bearish reversal candlestick formation (Like- pinbar, engulf bar, two bar, etc.)
- Stop Loss- Point D is the lowest level in the bullish ABCD pattern. Therefore, the stop loss should be below the reversal candlestick with some buffer. In an ideal market, condition put your stop loss 10-15 pips below the reversal candlestick.
- Take profit- The main target level of ABCD pattern is point A, which is similar to the Gartley pattern. In an ideal market condition, you should close your trade as soon as it reaches the point A. however, the real market is complex than the theoretical levels. There is a possibility of unexpected market behaviour; therefore, you can take partial closing with the movement of price.
Draw a Fibonacci retracement line from point A to point D. Make sure that this Fibonacci retracement is not a part of the ABCD pattern. It will only indicate a way to close the trade with the price movement.
After drawing the Fibonacci levels, you can take some partial closing at 38.2%, 50.00% and 61.8% Fibonacci levels. When the market moves to the 38.2% level, take the first partial profit-taking and move your stop loss at breakeven.
This image below represents how you can close your trade partially in a bullish ABCD pattern.
Bearish ABCD Trading Strategy
Like bullish ABCD trading strategy, read the price from the AB leg to CD leg and identify the point D.
- Entry- Enter the trade from point D after a bullish reversal candlestick formation (Like- pinbar, engulf bar, two bar, etc.)
- Stop Loss- Point D is the highest level in the bullish ABCD pattern. Therefore, the stop loss should be above the reversal candlestick with some buffer. In an ideal market condition, put your stop loss 10-15 pips above the reversal candlestick.
- Take profit- Your final take profit level for Bearish ABCD pattern is point A, which is similar to the Butterfly harmonic pattern.
Draw a Fibonacci retracement line from point A to point D. It will only indicate a way to close the trade with the price movement.
After drawing the Fibonacci levels, you can take some partial closing at 38.2%, 50.00% and 61.8% Fibonacci levels.
When the market moves to the 38.2% level, take the first partial profit-taking and move your stop loss at breakeven.
This image below represents how you can close your trade partially in a bearish ABCD pattern.
We can summarize the whole lesson in below-mentioned points:
- Like other harmonic trading tools, the ABCD pattern is a market reversal indicator.
- AB leg and CD leg should be almost similar in size.
- BC leg should be corrective compared to the AB leg.
- Point D is the entry point, and the stop loss should be below or above point D with some buffer.
Overall the ABCD pattern includes time, price and shape of the market. If you can merge these, this trading strategy can give you a good profit from the market reversal trading.
Furthermore, to avoid the unexpected market condition, make sure to use an appropriate money management system.