What is the AB=CD Trading Pattern?
The AB=CD trading pattern was developed by Larry Pesavento and Scott Carney after being first identified by H. M. Gartley. It has proven to be a very successful trading method for technical traders. This trading strategy enables you to predict when the price is ready to reverse course. The concept is that you should buy when prices are low and about to increase or sell when prices are high and about to decrease. It belongs to a renowned harmonic set of patterns. It is also known as an abcd pattern by some traders.
In comparison to most other harmonic arrangements, the AB=CD pattern has a lot fewer requirements, making it the simplest harmonic pattern. Furthermore, the AB=CD pattern is considerably simpler to spot on the price chart. Experts are confident in advising traders to use this setup after weeks of study, backtesting, and live trading.
There are two types of AB=CD Harmonic Patterns
There are two types of AB=CD trading patterns
- The bullish AB=CD
- The bearish AB=CD
This pattern starts with a drop in price (AB), which is followed by a turn around and a gain (BC). The BC move then reverses into a fresh bearish move (CD), which descends beneath the point B bottom. Following the completion of the CD shift, it is anticipated that there would be a price reversal and increase.
Similar to the bullish AB=CD pattern, but upside down, is this chart pattern. A new bearish move can turn the pattern’s bullish AB line, which serves as its initial foundation. The BC move is then undone by a fresh bullish movement that breaks through the top point. Traders can anticipate the price to invert once more and start a new negative run after identifying these characteristics.
Significance of ABCD harmonic pattern
Nature is made up of recurring patterns. Everything in nature happens after a certain amount of time. Natural patterns will be seen on the chart if you look at it and try to read the price. The repeating patterns are traded by advanced traders, who profit from the market.
Similar to this, AB=CD is a naturally occurring pattern. because it is quite uncommon for two price waves to be the same length on a price chart, as shown in the illustration below.
How do Fibonacci Ratios integrate with the pattern?
This pattern must follow specific Fibonacci ratios. Typically, the ABCD figure is related to two Fibonacci rules:
- The Fibonacci retracement of AB at 61.8 percent in BC.
- The 127.2 percent Fibonacci extension of BC is called CD.
Always follow the Fibonacci levels while trading the ABCD pattern. There are a number of indicators to help you check the criteria for the pattern.
What does the AB=CD trading pattern tell traders?
The ABCD pattern’s price action often begins with the price moving in a new direction (A), which subsequently develops a swing level (B), retraces a little amount at (C), and then resumes to take out the significant swing at (D). It keeps going till it reaches a distance AB or D. It is anticipated that the price trend for CD will reverse once it reaches a similar distance from AB. Specific Fibonacci levels will elicit responses from BC and CD at the same time.
Traders look to place entry positions on the chart at the start of the emerging reversal following the CD move when the AB=CD pattern is confirmed. The goal is to take a trading position and enter the market just before the CD move reverses.
How to trade the AB=CD harmonic trading pattern?
Trading the ABCD pattern entails following guidelines that explain how to enter a trade, lock in possible profits, and exit with a minimum loss if the market moves in the opposite way. When the pattern is present, the entrance of a trade, whether buy or sell, initiates.
You can begin looking for a trade opportunity at point D once the AB=CD harmonic pattern has been spotted. After the last C to D leg, when a reversal is anticipated to take place, buy and sell signals are issued. Traders can look to sell or open a short position at point D if the pattern is heading higher. It is advised to purchase the security at point D in anticipation if the pattern is heading lower.
Protect your trade
Depending on how the transaction is going, it is recommended to set stop-loss points just above or below point D. The chart pattern is invalidated and the likelihood of a reversal decreases if the move exceeds that level. The Fibonacci levels are used to place take-profit points. Trading participants might, for instance, watch for a return to the initial point A and place trailing stop-loss orders at the 28.2, 50, and 61.8 percent Fibonacci levels along the way.
Follow your strategy
The AB=CD chart pattern performs best when combined with other chart patterns or technical indicators, much like it does with other types of technical analysis. Once the AB=CD pattern has predicted a reversal, employ loudness as additional evidence.
Look at the price highs and lows on the chart as you analyse it. Watch the price as it divides into AB and BC. C must be lower than A and must be the intermediate high following the low at B for an ABCD pattern to be bullish. Point D must be lower low than B.
Don’t enter a transaction right away when the market reaches a spot where D might be found. Use certain strategies to make sure that, in the case of a bearish ABCD, the price is reversed up or down. A candlestick pattern with a reversal is the ideal scenario. A buy order can be placed at or above point D, the candle’s high.
Setting a profit target for your trade
A new Fibonacci retracement point from the pattern’s A to D can be used to determine where to take profits. If you’re unsure of where to set your profit, use the 61.8 percent mark, but pay particular attention to how the price responds around the levels. Close your position and take an early profit if the price struggles to overcome any of them.
Because identical waves have developed numerous times throughout history, this is a market pattern. It is a reversal chart pattern, and backtest results have shown that the price always tends to reverse from point D.