The ABCD Pattern

Last updated 8/1/2011 12:55 PM EST (GMT -5) 20 Comments

FX360 Technical Analyst Staff

Technical Analyst, GFT

What is an ABCD Pattern?

Why is the ABCD pattern important?

So how do I find an ABCD pattern?

    Each pattern has both a bullish and bearish version. Bullish patterns help identify higher probability opportunities to buy, or go “long.” Bearish patterns help signal opportunities to “short,” or sell. Each turning point (A, B, C, and D) represents a significant high or significant low on a price chart. These points define three consecutive price swings, or trends, which make up each of the three pattern “legs.” These are referred to as the AB leg, the BC leg, and the CD leg.

Trading is not an exact science. As a result, we use some key Fibonacci ratio relationships to look for proportions between AB and CD. Doing so will still give us an approximate range of where the ABCD pattern may complete—both in terms of time and price. This is why converging patterns help increase probabilities, and allow traders to more accurately determine entries and exits.

Each pattern leg is typically within a range of 3-13 bars/candles on any given timeframe, although p atterns may be much larger than 13 periods on a given timeframe. Traders may interpret this as a sign to move to a larger timeframe in which the pattern does fit within this range to check for trend/Fibonacci convergence .

There are 3 types of ABCD patterns (each with a bullish and bearish version) in which specific criteria/characteristics must be met…

Bullish ABCD Pattern Characteristics (buy at point D)

1.   Find AB

      a. Point A is a significant high

      b. Point B is a significant low

       c. In the move from A to B there can be no highs above point A, and no lows below B

2.   If AB, then find BC

        a. Point C must be lower than point A

        b. In the move from B up to C there can be no lows below point B, and no highs above point C

         c. Point C will ideally be 61.8% or 78.6% of AB

                  i. In strongly trending markets, BC may only be 38.2% or 50% of AB

3.   If BC, then draw CD

        a . Point D must be lower than point B (market successfully achieves a new low)

        b. I n the move from C down to D there can be no highs above point C, and no lows below point D

        c. Determine where D may complete (price)

                  i. CD may equal AB in price

                  ii. CD may be 127.2% or 161.8% of AB in price

                  iii. CD may be 127.2% or 161.8% of BC in price

         d. Determine when point D may complete (time) for additional confirmation 

                    i. CD may equal AB in time

                    ii. CD may be 61.8% or 78.6% time of AB

                    iii. CD may be 127.2% or 161.8% time of AB

4.   Look for fib, pattern, trend convergence

5.   Watch for price gaps and/or wide-ranging bars/candles in the CD leg, especially as market approaches point D . Traders may interpret these as signs of a potential strongly trending market and expect to see 127.2% or 161.8% price extensions

Bearish ABCD Pattern Characteristics (sell at point D)

1. Find AB

     a. Point A is a significant low

     b. Point B is a significant high

      c. In the move from A up to B there can be no lows below point A, and no highs above point B

2.   If AB, then find BC

     a. Point C must be higher than point A

     b. In the move from B down to C there can be no highs above point B, and no lows below point C

     c. Point C will ideally be 61.8% or 78.6% of AB

                   i. In strongly trending markets, BC may only be 38.2% or 50% of AB

3.  If BC, then draw CD

     a. Point D must be higher than point B

     b. In the move from C up to D there can be no lows below point C, and no highs above point D

     c. Determine where D may complete (price)

                    i.   CD may equal AB in price

                    ii.   CD may be 127.2% or 161.8% of AB in price

                    iii.   CD may be 127.2% or 161.8% of BC in price

     d. Determine when point D may complete (time) for additional confirmation

                      i.   CD may equal AB in time

                      ii.   CD may be 61.8% or 78.6% time of AB

                      iii.   CD may be 127.2% or 161.8% time of AB

6.   Look for fib, pattern, trend convergence

7.   Watch for price gaps and/or wide-ranging bars/candles in the CD leg, especially as market approaches point D. Traders may interpret these as signs of a potential strongly trending market and expect to see 127.2% or 161.8% price extensions

• Share this:

Comments (20)

Artie

March 26, 2010 at 02:45 PM ET

Except for the two graphics at the top of the article, I get the red 'x' on all of the other graphics - this includes the e-mail, the pdf, and via the web site.

ugogal

March 26, 2010 at 03:06 PM ET

Thanks... interesting and helpful explanation.
Connie
Phoenix, AZ

bchi

March 26, 2010 at 03:06 PM ET

Thanks for the post. I'd like to see additional notes on expected profit target from point D if possible. :)

rstojsic

March 29, 2010 at 10:11 AM ET

generally speaking, targets begin at fib retracements of CD

rookie

March 26, 2010 at 05:11 PM ET

thanks, Roger. as your former student, I echo the importance of these patterns coupled with whatever the fundamental sentiment is that will apply during whatever time frame you are trading in,ie you should not try to trade a long pattern on the EUR/USD in this last week. important also is to not trade too many lots and get scared out of your trade too soon. take a look at the one hr chart on low magnification and see what the normal patterns are and then use the ABCD pattern to try and find the future tops and bottoms

Satbinder Bhoot

March 26, 2010 at 07:01 PM ET

I experience the same as Artie. Except for the two graphics at the very top of the article, I get the blue "?" in a box on all of the other graphics - this includes the e-mail, the pdf, and via the web site. If the article could be resent with the graphics being displayed for the other three pattern characteristics that would be very helpful in following the commentary.

tenghoonaw

March 26, 2010 at 09:22 PM ET

likewise here with the red "x", help !

:)

Derekis

March 28, 2010 at 11:48 PM ET

Hi Roger,

I am a tat confused by the ABCD pattern's buying and selling signals in relation to the overall trend.

For example, the ABCD Buy pattern clearly states a DOWNTREND when pt D is formed. Series of Lower Highs & Lows.

When we buy at pt D we are in fact going against the LONGER TERM DOWNTREND for a Buy trade.

When we go long at Pt D, is this considered a short term trade with the limitation that price might rise to our target of say Pt E, which is the maximum of Fib 61.8% or equivalent or less than Pt B to Pt C?

Please advice.

Many thanks in advance.
Derekis

rstojsic

March 29, 2010 at 12:04 PM ET

great question. the word "trend" is highly subjective as there are several types of trend (short-term, long-term, etc.) so what i mean by then "overall" trend is the trend relative to the type of trade (intraday, swing, etc.) In other words, we may see a pattern forming on a 5 min chart and the idea is to see how that "fits" into the trend of the last couple days. If we have a pattern on a 4hr chart, for example, one would look to see how/where that pattern fits into the trend/channel of the last several days, and so on. hope this helps.

You

March 29, 2010 at 10:19 AM ET

Same thing here with the x's!!

rstojsic

March 29, 2010 at 11:58 AM ET

formatting should be all fixed now. thanks everyone for your patience!

debono

July 10, 2010 at 01:27 AM ET

A quick glance at the daily USD/JPY and the ABCD looks a great set up after the recent completion of a 123 breakout which coincidently completed at the low on 7th July.
Question: would target be 61.8% of CD leg? which is also previous congestion zone in March
Is there anyway to post charts here ?

rstojsic

July 11, 2010 at 08:25 AM ET

you can try posting a link to free online photo album like snapfish?

debono

July 11, 2010 at 07:59 PM ET

good idea Rog Thanks :)

Try this and hope it works

http://i713.photobucket.com/albums/ww138/debono111/SpotFXUSD_JPY-.png

I already have a small open position based on a smaller T/F trading op' but looking to now add to that possition with a longer limit.

rstojsic

July 12, 2010 at 12:19 PM ET

not sure about that 61.8% target as prices are now testing daily 38.2% resistance near bear trendline in addition to a potential bearish pseudo-star currently forming. in other words, even if prices do eventually reach 61.8% we may see a pullback down to 61.8%-78.6% of current rally near 87.80-87.50 before potential move up to 61.8% of CD, which would likely take several days to complete meaning more fundamental significance.

http://s805.photobucket.com/albums/yy334/rstojsic/?action=view¤t=usd-jpy_daily_7-12-201012-12-41PM.png

so from a risk/reward standpoint it doesn’t make much sense to add to position at current levels vs. looking to buy off this hypothetical pullback, for example, as stops would be set below D, or if prices reach new highs above the current 89.15 top (and more so with a daily close above 38.2% daily resistance) in terms of a break out (with stops set just below most recent significant near-term bottom (on 4hr chart, for example) prior to new highs). in the end, there's always going to be valid reasons to buy or to sell so for me it boils down to risk/reward. the way i look at it is over time being right is less important than being profitable which is what risk/reward is all about. :) hope this helps!

debono

July 13, 2010 at 04:11 AM ET

Thanks Rog

Yes it helps!

makes a lot of sense and still waiting to take a new postion after limit hit .
I couldn't open your photoabucket chart though :(

thanks again

Mike

December 24, 2010 at 01:04 PM ET

is it not too risky to take a ABCD daily pattern where the weekly and monthly trend is bearish ?

tscoolberth

July 12, 2010 at 06:53 PM ET

Wow , this is really bucking the maxim "the trend is your friend."

BobH

February 15, 2011 at 02:25 PM ET

Tools-Internet Options--Advanced--Multimedia--Show Pictures

maap

February 16, 2011 at 03:10 AM ET

Hi,

How can I set the stop loss and profit target in ABCD pattern?
Please help me to find it.

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...