The ABCD is a Harmonic pattern that describes a potential reversal. The pattern was discovered by H.M. Gartley and presented in the book “Profits in the Stock Market.” Later, Scott Carney further developed the ABCD pattern.
What is the ABCD pattern?
The structure of the ABCD pattern is based on formation, like any other type of Gartley pattern. The pattern develops when the line AB is equal to the line CD. The lines AB and CD are known as legs, while the line BC is called correction or retracement.
Each part of the pattern is like Fibonacci numbers and represents short-term consolidation against the trend. Traders utilize the Fibonacci tool to find the pattern on the chart.
This is how the pattern appears on the chart.
As one can observe, the pattern establishes by connecting highs and lows between points A, B, C, and D.
Three rules determine the validity of the ABCD pattern. These are:
- For the pattern to emerge, the price travels from A to B and then C to D. The distance between A to B and C to D should be equal.
- The line BC must show a retracement of 61.8% to 78.6% of AB. Also, the CD should show an extension of 127.2% to 161.8%.
- The CD leg should be an extension of AB between 127.2% to 161.8%.
Trades often confuse the ABCD pattern with the Three-Drive pattern. The structure of both patterns looks similar, but the Three-Drive has three legs (A, B, and C) known as drives.
How to use the ABCD pattern?
To implement the ABCD, traders use a bullish and bearish version of the pattern.
Bullish ABCD pattern
The bullish pattern surfaces in a downtrend and signals a potential reversal.
Bearish ABCD pattern
The bearish ABCD pattern appears in an uptrend and identifies a downward price move.
To take positions, traders wait for the pattern to complete, then go long or short at point D. In the bullish version, traders buy at D, while in the bearish version, traders sell at D. The stop-losses are set above or below the point D. However, a conservative trader may take positions after point D.
Due to its overall structure, traders look for the highs and lows when trading the ABCD pattern. Moreover, a useful way to trade the pattern is to combine it with the zig-zag indicator. The indicator can draw price highs and lows, so traders can easily spot the ABCD pattern.
The ABCD pattern works in the trending markets, but it can give false signals in the ranging markets. Traders often mistook the price highs and lows with the ABCD pattern without determining its validity. Therefore, in the ranging markets, the use of momentum oscillators comes in handy.
ABCD pattern trading strategy
The ABCD works on every timeframe. Short-term traders view the pattern on daily or weekly charts to find the potential reversal and then apply it in their trading strategies.
The longer the timeframe, the better would be the formation of the ABCD pattern.
ABCD buy strategy
- Identify the pattern in a downtrend.
- Wait for the price bar to go bullish before entering.
- Enter the trade at point D.
- Place a stop-loss near the recent low from point D.
- Exit the trade when the price starts to decline.
ABCD sell strategy
- Locate the pattern in an uptrend.
- Wait for the price bar to go bearish before entering.
- Enter the trade at point D.
- Set a stop-loss near the recent high from point D.
- Exit the trade when the price starts to rise.
ABCD pattern conclusion
The ABCD is a simple Harmonic pattern that can usually be identified easily. Traders should consider the rules for confirming the pattern and not confuse it with price highs and lows.
The ABCD Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
I would prefer to use the majority of candlestick patterns such as the ABCD Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The ABCD Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the ABCD Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the ABCD Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.