ABCD patterns Introduction and How to Trade Them
A common saying in the Forex world is the one that states: "Learn and trade using simple systems instead of intricate ones". ABCD pattern is one of those simple model, that will allow you to trade in an efficient manner. Let's see in depth what these AB=CD patterns are.
What is an AB=CD pattern?
When you are searching for a harmonic pattern in your chart, you're actually searching for an AB=CD pattern, plus another point, the X. So, to make things easier, AB=CD can be seen as a brick that construct more complex structures. As you can see, its name is AB equals CD, to point out that the AB leg has the same length of CD leg. That allow us to make another conclusion: market moves in a symmetrical way. By that, i really mean that if you count the bars, or the candlesticks, that forms the AB leg, you'll see that they are the same as the CD leg. For example, if you have an AB leg that is formed by 10 bars, and it took 3 hours to form, you can expect that the CD leg will have the same number of candlesticks and it will take the same amount of time of AB leg to form.
In the above image, swings are showing some Harmonicity (for harmonicity i intend symmetric and more or less of the same length). I took this one because it was very good to explain how to find those patterns, and how to trade them. I drew a Fibonacci from the top of the swing to its end, to find the retracement of the A-B leg that, in this case, is the 38.2% of the A-B leg. We know that a 38.2% retracement corresponds to a 240% B-C projection. Let's see if that corresponds to the truth.
It worked! So, as you can see, after the price action reach the B point, it bounces back, and retraces to the C point.
The rule is: the deeper the retracement, the lower the projection.
In this case, however, we've got a 38.2% B-C retracement, and that means we will get a higher B-C projection.
How can i trade that?
An AB=CD pattern is a nice trading opportunity, however, you should be careful to the warning signs that are:
- Large body candlesticks, gaps, or high momentum near the completion point
- Very steep up/downtrend
After that you checked for any warning signs, and obviously, you didn't find any of them, you're ready to trade the pattern. In this case, when the price action is near the 240% B-C projection you can open a buy order, and you can place the stop loss a few pips below the D point. A further confirmation is the RSI, the Relative Strenght Index, that is in the Oversold area (below 30%). I want to note that, a pattern like the one above, is technically risk free and you can trade it accordingly to your trading plan.
Tha's the final result