What Is ABCD in forex?
The ABCD is one of the most popular patterns used to determine when and where to enter or exit a position in forex trading. Since the forex market is known for having high volatility, traders use different trading tools and indicators to make better trading decisions. In this piece, we’ll discuss how to use the ABCD pattern in forex.
How does the ABCD trading pattern looks like?
The ABCD trading pattern is a visual time/price trading pattern comprised of three consecutive trends or price swings. It looks like a geometric shape reflecting a rhythmic style of the market moves.
Importance of ABCD trading pattern
To find profitable trading opportunities, the use of the ABCD trading pattern is crucial. It helps traders finding suitable entry or exit trade points across all the financial markets, including but not limited to forex, futures, and stocks.
Not to mention, the ABCD trading pattern is equally effective to apply upon any time frame in any market condition. It also serves as the base for all other trading patterns.
Starting from point A, when the ABCD trading pattern reaches point D, it reflects the highest probability to enter a trade. The pattern provides strong trading signals amid the convergence of different trading scenarios within the same or multiple time frames. The ABCD pattern also helps traders determine the risk/reward ratio even before opening a position.
How to find the ABCD trading pattern in forex?
The ABCD trading pattern comes with both the bearish and bullish versions. The bullish pattern enables traders to gauge the highest portability to go long or buy an underlying asset. On the other hand, the bearish pattern help traders find the best possible spot to sell a security.
The trading pattern involves four turning points (A-B-C-D), reflecting significant lows and highs on an underlying asset price chart. Each pattern is made up of these points, reflecting three continuous swings or trends. These patterns are sometimes referred to as legs, i-e AB leg, BC leg, and CD leg.
While looking for the proportions between AB & CD, traders sometimes use major Fibonacci relationships. That helps traders finding out the possible range of the completion of the ABCD trading pattern in terms of both price and time frame. Remember, the ABCD trading pattern doesn’t provide absolute confirmation. That’s why traders also use convergence patterns to determine the entry or exit points for a greater sense of reliability.
Each leg of the trading pattern consists of 3 to 13 candles in a specific time frame. However, the pattern can sustain even for a longer duration involving more candles in a given period.
As mentioned above, each ABCD trading pattern has both bullish and bearish versions. Given below are some rules to find out the bullish or bearish ABCD patterns.
Rules to find out Bullish ABCD Pattern
Step 1: Find the AB pattern. In the diagram, you can see that points A & B represent significant high and low, respectively. It is worth mentioning here that there can’t be any high or low above or below points A and B from point A to B.
Step 2: After finding the AB pattern, now look for the BC pattern. Remember that point “C” will be lower than the point “A” in any case. Also, from point B to C, there won’t be any low below point B. No high above point C. Ideally, point C will have a reading of 78.6% or 61.8% of the AB pattern, while the BC pattern might have a reading of 38.2% or 50% of the AB pattern.
Step 3: After finding the BC, traders need to draw the CD pattern. Since a new low level is being achieved, point D will be lower than point C. Following the rules of the previous pattern, from point C to D, there won’t be any high above the C while no low will be lower than D. Look for the point where D marks its completion in price.
Traders may apply the Fibonacci or ABCD tool here. You may also notice that CD is equal to AB in price, while CD will be 127.2% or 161.8% of Both AB and BC trends. Traders may also need to note the point when D marks completion in terms of time. That’s for having additional confirmation. Now, apply the Fibonacci time tool. You may notice CD being equalled 61.8% to 78.6% of AB in time. It might also show the reading of 127.2% or 161.8% of AB in time.
Step 4: Traders need to watch out for the Fibonacci levels, trend convergence as well as patterns.
Step5: Traders may also have to look out for the price gaps and high range candles in the CD pattern. That’s become even more critical as the market approaches its completion at point D. Here, traders might think the market is strongly trending. Hence they might start anticipating price extensions of 127.2% or 161.8%.
Rules to find out Bearish ABCD Pattern
Step 1: Traders need to find the AB pattern. Just like rules for bullish Patterns, A & B represents significant low and high, respectively. Also, from A to B, there won’t be any low beyond A, and point B will be the highest high.
Step2: After finding AB, you need to look for the BC pattern. Remember, point C should not be lower than A in any case. From B to C, there won’t be any high or low after B (high) and C (low), respectively. Point C should have an ideal reading of 61.8% or 78.6% of the AB leg. However, if a market is strongly trending, then the BC might only show a reading of 38.2% or 50% of trend AB.
Step3: Here, traders have to find CD. Point D needs to be above point C. C to D, C will be the lowest low, and D will be the highest. Identify where point D marks its price completion. Traders may note that the price of CD is equal to AB, or CD may be equals to 127.2% or 161.8% price of the AB & BC.
For additional confirmation, traders may also need to detect the time D takes to get completed. The CD may be equals to trend AB in time. It may also be possible that the CD trend takes 61.8% or 78.6% more time than the AB trend.
Step 4: Traders may also need to watch out for the patterns, Fibonacci levels, and trend convergence.
Step5: Just like the rules for bullish patterns, traders also need to watch out for the price gaps and range bars, precisely when the market moves toward point D.
At this point, traders might anticipate a 27.2% or 161.8% extension in prices, assuming the market to be strong trending.