The Harmonic ABCD Pattern, also known as the AB=CD Pattern, is one of the most powerful tools to predict potential reversal zones for the price of the security. Harmonic patterns were first introduced in 1935 by Harold M. Gartley in his book Profits in the Stock Market. And have been used by technical Analysts ever since. In this article, we will explore the ABCD pattern, And how you can use it to predict potential price moves in the
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What Is an ABCD Pattern?
ABCD Pattern is a style in which the market moves. The Pattern consists of 3 swings and looks like a lightning bolt when plotted in the price chart. It is a leading indicator that helps traders and investors to determine where & when to enter and exit a trade.
Types of AB=CD Patterns
There are two types of ABCD Pattern
Bullish ABCD pattern:
This pattern occurs when the price has been in a downtrend. The pattern begins with a price decline (AB). Followed by a reversal (BC). The BC movement then reverses to an additional bearish move (CD) that is lower than the bottom made at point B. The price will be expected to reverse and move upwards after the completion of the CD leg.
Bearish ABCD Pattern
This pattern occurs when the price has been in an uptrend. The pattern begins with an up move in the price (AB) followed by a reversal (BC). The BC movement then reverses to an additional bullish move (CD) higher than the top made at point B. The price is expected to reverse and move downwards after completing the CD leg.
How to Identify ABCD Pattern
Bullish AB=CD Pattern
A perfect Bullish ABCD pattern is when the price structure meets the following specifications while in a downtrend.
- AB=CD
- C point retracement from 0.618 of AB
- CD is completed at 1.618 projection of BC
- Equal duration of time for AB and CD.
Bearish AB=CD Pattern
A perfect bearish ABCD pattern is when the price structure meets the following specifications while in an uptrend
- AB=CD
- C point retracement from 0.618 of AB
- CD is completed at 1.618 projection of BC
- equal time duration for AB and CD.
The above specifications are for textbook ABCD patterns. However, it has other variations. C-point retracement from different Fibonacci Retracement levels, like, 0.382, 0.50, Can be considered for an ABCD pattern. With every different C-point retracement level, the projection of point D changes. To calculate where the price can travel after retracting from other Fibonacci retracement levels, you can use our ABCD pattern Calculator.
How to Trade ABCD Pattern
The key to successfully trading Harmonic ABCD patterns is to trade with guidelines. The pattern requires guidelines for entering the trade, locking in potential profits, and then exiting with a minimum loss if the market goes in the opposite direction.
To begin with, A trader should enter a trade only after the completion of the pattern, which means after the PRZ is determined. Now, A trader should look for a reversal signal, for example, a hammer candle or hanging man candlestick pattern. An entry can be taken when a reversal signal is observed. By keeping the stop loss below the PRZ ( in a buy position) or above the PRZ (in a Short position)
Here is an example.
Significance of ABCD Pattern
-The pattern is a very reliable pattern with great risk/reward opportunities
– forms the bases of all other harmonic patterns.
– Is very useful for predicting trend reversals
-Works in every kind of market, be it forex, stock crypto
– Works in different market conditions and timeframes.
Conclusion
ABCD pattern is a very reliable and accurate tool to predict reversals in the market. It forms the basis of all Harmonic patterns. However, just like Other technical tools, it works best when used in conjunction with other tools and indicators in a broader trading system.
