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The ABCD Forex Trading Strategy

The ABCD forex trading method

Traders that excel at technical analysis are more likely to be successful. The most crucial component of technical analysis is the ability to consistently monitor the charts for patterns that may be exploited

As technical analysts are sure that the market moves in patterns and that these patterns are repeatable and hence tradeable in a similar manner, they use technical analysis to make trading decisions. The ABCD pattern is a dependable chart pattern that appears regularly on the market.

Even beginner forex technical traders will find it simple to see and trade this pattern as it develops over time. Advanced forex traders, on the other hand, might take advantage of the pattern and employ intricate technical trading tactics. Furthermore, because the pattern can be described mathematically, many software programmers are able to scan and detect the ABCD pattern automatically, which they may then include into a variety of auto-trading software programs. Manually detecting them, on the other hand, will provide you with an advantage in effectively trading this pattern.

All intraday chart time frames, as well as daily, weekly, and monthly chart time periods, exhibit the pattern. Consequently, technical forex traders may study and apply them to a variety of trading methods, including short-term and long-term trading strategies, in the forex market.

Furthermore, because the ABCD pattern serves as the foundation for many other chart patterns, once a trader has mastered the ABCD pattern, it will be much easier for him or her to master other chart patterns as well. The ABCD pattern is a tradable pattern that may be traded independently since it gives forex traders entry points, stop-loss points, and take-profit points. It is a reversal chart pattern that allows the trader to BUY at low prices and SELL at high 

What Is the ABCD Forex Trading Strategy? 

What Is The ABCD Pattern

The design depicts the price changes in a Zig-Zag pattern and is reminiscent of a lightning bolt or an electrical symbol, among other things. The ABCD pattern is made up of four reversal points, which are designated as A, B, C, and D. Each of these points corresponds to a price movement in a phase or leg from point A to B, point B to C, point C to D, and point D to A. Once point D is reached, the trend is complete, and an entry point is signaled by the arrow.

In the leg BC, there is an incremental phase, which is followed by a corrective phase in the leg AB. The increasing nature of the next phase CD outweighs the BC leg. Position D is often considered to be the most advantageous entry point for a reversal trade.

ABCD Forex Trading Strategies Come in a Variety of Forms

The ABCD pattern may be further subdivided into two types: BULLISH patterns and BEARISH patterns, depending on whether it represents a possible BUY or SELL opportunity.

ABCD Pattern in a bullish direction

The ABCD pattern, which is bullish, may be classified into three varieties.

Bullish AB=CD pattern

Bullish Classic ABCD pattern.

Bullish ABCD Extension Pattern

Bullish AB=CD Pattern
Bullish AB=CD Pattern

The Bullish AB=CD pattern is the most straightforward of the bunch, and its form makes it easy to recognize. During the AB leg, the price swings downwards, with point A being the highest and point B being the lowest. Look for BC, a corrective leg, after Phase AB is finished, with B being the lowest price and C being the highest price during the BC move. The CD leg is another developmental step once the BC leg is completed. The length of AB will equal the length of the CB wave, which is an important characteristic of this pattern. Price activity should corroborate the reversal from point D.

Bullish Classic ABCD Pattern

The AB=CD pattern is comparable to the Classic ABCD bullish pattern. The length of waves BC and CD is the key distinction. If the length of the BC wave is measured in this pattern, it should be 61.8 percent or 78.6 percent of the length of the AB wave. In addition, the CD wave should be 127.2 percent or 161.8 percent of the BC wave in length. This pattern is based on the relationship between BC and er waves.

ABCD Extension Chart Pattern (Bullish)

Bullish ABCD Extension Chart Pattern

The length of AB and CD is related to the Bullish ABCD extension chart pattern. The CD wave is longer in this pattern, accounting for more than 127.2 percent or 161.8 percent of the AB wave. As a result of this pattern, the price might make a lengthier final move before reversing. When determining the reversal point D, caution should be given because the price may continue to move far before reversing. Before entering a trade, traders should use price action, support, and resistance to confirm the reversal.

ABCD Chart Pattern (Bearish)

The bearish ABCD pattern can be further subdivided into the following subcategories:

Bearish AB=CD pattern.

Bearish Classic ABCD pattern.

Bearish ABCD Extension pattern

Bearish AB=CD Chart Pattern
Bearish AB=CD Chart pattern

The Negative ABCD pattern is identical to the Bullish ABCD pattern, except that the reversal from point D will signal the start of a bearish market trend. This chart pattern is built on the relationship between the lengths of AB and CD.

Classic ABCD Chart Pattern (Bearish)

The Fibonacci ratios of 61.8 percent, 78.6 percent, 127.23 percent, and 161.8 percent are used to measure the relationship between the waves in this Classic ABCD pattern.

ABCD Extension Pattern (Bearish)

Bearish ABCD Extension

The Fibonacci ratio of 127.2 percent and 161.8 percent is used to establish the relationship between waves AB and CD in the Bearish ABCD extension chart pattern. Because this pattern appears towards the end of a powerful Bullish trend, forex traders should be cautious when confirming price reversal because the trend may persist for a long time.

Bearish ABCD approach – How to Trade

The ABCD chart pattern, as previously said, is a full tradeable pattern that offers the trader the optimum entry price, take profit, and stop-loss. The trade setup of the BEARISH ABCD chart pattern can be seen on the EURUSD H1 chart above. During this period, the price went from A to B, where A and B are the respective low and high. The ABCD pattern is completed when the corrective movement terminates at C and the wave CD continues and goes to D.

The optimal SELL entry price is at point D when the pattern is complete. The potential take profit point is the duration of AD in either time or price or both, and the stop loss can be positioned above the swig high point D. The time and price should ideally correspond to the duration of AD.

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Bullish ABCD approach – How to Trade

The Bullish ABCD pattern is identical to the Bearish ABCD pattern in terms of trading. Upon completion of the pattern, the optimum BUY entry position is provided. The optimal stop loss is below the swing low point D, while the probable take profit is the wave AD’s length in time and price or both. In terms of entry, take profit, and stop-loss points, all of the Bullish and Bearish patterns AB=CD, Classic ABCD, and ABCD extension pattern may be traded in the same way. The relationship between the waves AB, BC, and CD is the primary distinction between the patterns. Trading them is simple and comparable after the forex traders have spotted the pattern and the completion point D.

The easiest way to assure a solid entry point is to use other indications, as well as the presence of previously defined support and resistance levels or channels, to confirm the price reversal at point D. On successful execution, the pattern offers a strong risk-to-reward ratio, albeit there may be instances when the stop loss is struck frequently. However, forex technical traders must initially maintain a large price gap between their entry point and stop loss, then modify it once the trend has reversed and begun to unfold.

Limitations

The ABCD chart pattern’s main flaw is the forex trader’s inability to correctly recognize the pattern. The pattern is identified using Fibonacci ratios; however, traders sometimes ignore the Fibo levels or wait for the price to reverse exactly at the pattern’s Fibo level. However, in real-world forex trading, prices may not reverse at the precise moment, necessitating a degree of awareness on the part of the forex trader in order to detect the waves and reach completion point D.

During a trending market, the price may advance a lot and take a long time to reach completion point D before reversing. Fake price pushes may follow the reversals, causing the stops to be hit often.

Conclusion

The ABCD chart pattern, along with its variants, serves as the foundation for other chart patterns such as Pennants and Flags, therefore forex traders should take the time to manually identify and locate them, even if there is plenty of software available to plot them automatically. Despite the fact that the ABCD patterns are prone to failure, they have a greater risk-to-reward ratio, which compensates for these failures. It’s worth noting that, while point D may be measured and discovered, the price action that verifies the reversal is crucial in this pattern.