The ABCD pattern is basis of harmonic pattern, maybe you have learned about the Gartley pattern, this time we will talk about ABCD, this is a very well-known pattern and is one of the ways traders conduct market analysis.
The tool needed to do ABCD analysis is Fibonacci, why is it Fibonacci? Because this is to measure price level that is there and required carefulness of the trader.
When paying attention to patterns formed by dynamic market, this often occurs and provides a reversal signal that is of good accuracy.
ABCD Pattern Explained
ABCD is one of the popular Fibonacci base patterns, traders use as a reversal indicator. Simply put, if this has been fully formed, then the price will most likely face the opposite reversal.
In addition, a trader can use the ABCD in downtrend or uptrend market conditions. Specifically, a bearish ABCD indicates a reversal will decline after the price moves rally in a certain period.
Conversely, a bullish ABCD pattern is an indication that prices will skyrocket sharply after a downward trend over a period of time.
The rules of bullish and bearish ABCD trading patterns are the same, you only need to consider the direction of your trading and market movements as predicted.
This consists of 3 price swings. The AB and CD lines are called “leg”, the BC line explains the correction or retracement.
ABCD pattern examples
If we use Fibonacci line in AB leg, then BC correction line will definitely reach 0.618 levels. And the CD line along 1,272 levels as extensions (advanced) of the BC line.
What we need to do is wait for this pattern to formed and wait for point D to form before deciding whether to open a Short or Long position, look image below.
It is important to know, make sure the ABCD are formed completely following the basic rules so that the accuracy of the ABCD reversal signal is reliable. Examples are as follows:
- Line AB and CD are known as a leg.
- While BC line is called correction or retracement.
- The BC line must be in the retracement of 0.38 to 0.78 from the foot AB. Use the Fibonacci tool to measure the retracement.
- CD leg is extensions of the Fibonacci point 1.27 to 1.68 from the BC line.
- The length of AB line is ideally the same as CD line.
- The period (length of time to reach one point to another) feet AB is the same as length of the CD.
Three Drives Pattern
The Three Drives pattern is actually not much different with the ABCD is, only, in Three Drives there are two retracement and three legs as “drive”. This pattern is more rarely found on charts than the ABCD, but its accuracy is relatively higher.
In the picture above, it can be seen that Point A must be 61.8% retracement of the leg 1, point B must also be a retracement of leg 2 while leg 2 itself is an extension of 1,272 from correction point A.While point 3 is an extension 1,272 of correction point B
In order for the accuracy of Three Drives pattern to have a high level of accuracy, make sure that each part of the pattern meets the following criteria:
- A retracement is a correction of 38% to 78% of drive 1.
- B retracement is the Fibonacci retracement 0.38 to 0.78 from a drive
- Drive 2 is an extension of 127% to 168% of correction A.
- Drive 3 is a Fibonacci extension of 1.27 to 1.68 from correction B.
As a note, after price reaches the B retracement point, is a concern for standby that signal will appear immediately. From there, you can open long or short positions after the price reaches the point of the Fibonacci 1.27 extension from retracement B (reaching drive 3).
- The drive 2 period is the same as drive 3.
- The time to complete A and B retracements is ideally the same
Drawing ABCD pattern
To draw the ABCD the first step you should consider is that Step finds the price pattern of potential Harmonic.
As we understand the components of the ABCD consist of:
- Line AB and CD line as legs.
- BC line as a correction / retracement
To draw a drawing pattern, you need to follow the rules:
- When drawing the AB line, correction of BC must reach Fibo Retracement 0.618.
- When drawing the CD line, it must at least reach Fibo Retracement 0.0 or up to Fibo Extension 1,272 from BC.
- AB length is the same as the CD.
- The duration of price movements from point A to point B must be the same as the length of price movements from point C to point D.
If there are signs that a price chart will form or has formed a certain pattern, draw a Fibonacci retracement with a swing from point (A) to point (B).
Measure the length of the correction, make sure that at least Retracement is 0.618 (C). Also, make sure that the price reverses towards the original trend until it reaches Retracement 0.0 or Extension 1,272 (D)
The next step is to measure the price potential of Harmonic ABCD.
Using the Fibonacci tool, we note our observations in identifying potential patterns
Observe price movements with patience or put pending orders at levels that coincide with point (D). At point (D), open a Buy position immediately after the complete ABCD. Stop Loss and Target Profits can be executed after the price reaches a certain Fibonacci Retracement level, uses Trailing Stop, or according to the risk/reward ratio of each trader.
The trading technique with ABCD is based on Fibonacci levels which are known to be basis of Support and Resistance. Therefore, duration of the trend, following Stop Loss and Profit Target, can be predicted following the Support and Resistance found through the Fibonacci rule.
ABCD pattern indicator free download
Analysis market by searching for ABCD has good accuracy, so many traders use this method.
But sometimes some traders may be reluctant to draw lines manually and prefer to use ABCD indicator.
If you are looking for this indicator, you might find that it’s paid and that it’s free, functions are the same, but the commercial indicators usually have an attractive appearance.
If you are a trader who likes free indicators, you can download and pair it on your MT4
One source where you can try to download is here
ABCD Pattern Success Rate
One reason why many traders like trading techniques with the ABCD its reliability in identifying reversal points and predicting how long a trend will last. However, that does not mean this technique is 100% right and there are no weaknesses at all.
The trading technique with the Harmonic Pattern requires precision and accuracy in order to accurately review price movements. Often, we see as if price movements have formed a certain pattern, but in fact have not reached the required Fibonacci level. If that happens, then know that the pattern that appears may not necessarily be called a ABCD, it is less reliable and maybe the wrong target.
If you use a particular trading method, then what will be a concern is how results of the trading method, whether it gives a higher success rate than the loss, or otherwise gives a failure that is greater than the profit
The trading method uses ABCD analysis, this gives a higher success rate if you are well able to recognize the patterns formed on the market, the percentage is 60-80% if a trader has eagle eyes in finding a valid and complete pattern.
Thus what you need when using this analysis is your carefulness recognizes the pattern formation well, your experience will determine how well you recognize this.
In addition, what you need to pay attention to is stop loss and targets with this pattern, ideally, traders use a risk-reward ratio to manage their capital because trading methods are not always correct in predicting future prices
Being part of harmonic pattern, ABCD is the basis of various other derivative patterns, learning the concept of the rules of this pattern will provide easier knowledge and understanding to learn other patterns.
This is one method of analysis with candlestick pattern which is a simple analysis method but provides good accuracy
To be more successful in using this trading method you need discipline, run your own trading rules and always conduct trading evaluations, find errors and fix them
In the end all trading results, you will determine, there is no perfect trading method considering the forex market is very complex, therefore you have to trade and use your funds wisely