Advanced technical analysis
Fibonacci ratios aren't just useful for identifying support and resistance levels. They also form the basis of some key chart patterns – including the ABCD.
What is the ABCD pattern?
The ABCD pattern is a visual, geometric chart pattern comprised of three consecutive price swings. It looks like a diagonal lightning bolt and can indicate an upcoming trading opportunity.
This is a valuable pattern to know, as it reflects the rhythmic style in which the market moves. Essentially, it is made up of four significant highs and lows on chart:
- A new prevailing trend forms at A
- The market retraces at B
- The initial trend resumes at C
- You can trade the next correction at D
This can appear in both a buy form and a sell form, across any market (including forex, stocks and more), any condition (rangebound, uptrends and downtrends) and any timeframe.
Often, a market’s movement simply repeats the ABCD pattern over time:
In this example, you might notice that some of the patterns converge. This provides a stronger trading signal than a single ABCD pattern in isolation.
Finding the ABCD pattern
To find the ABCD pattern, traders look for the legs, or the moves between points. AB and CD denote the moves in the direction of the overall trend, while BC is the retracement.
Each leg typically lasts between three and 13 bars. If you’ve found an ABCD with legs that last longer than 13 bars, you might want to move to a larger timeframe and check for trend/Fibonacci convergence.
If you think you've spotted an ABCD, the next step is to use Fibonacci ratios to check that it is valid. This also helps identify where the pattern may complete – and where to open your position.
In a 'classic' ABCD, the BC line should be 61.8% or 78.6% of AB. So, if you use your Fibonacci retracement tool on the initial move from A to B, BC should end at the 61.8 or 78.6 level.
In strongly trending markets, BC may only be 38.2% or 50% of AB.
CD should then be 127.2% or 161.8% of BC. On a bearish ABCD, you might choose to enter a sell position at this point. On a bullish one, you might want to buy the market.
The ABCD extension
Sometimes, you might spot an 'ABCD extension'. In this pattern, CD is 127.2% or 161.8% longer than AB instead of BC.
ABCD pattern rules
There are a few other rules to follow when finding ABCDs. Firstly, ideally you want the time and length of AB and CD to be roughly equal (unless you have found an ABCD extension).
- In the move from A to B, the market should not go beyond either A or B
- In the move from B to C, the market should not go beyond either B or C
- In the move from C to D, the market should not go beyond either C or D
- In a bullish ABCD, point C must be lower than A and D must be lower than B
- In a bearish one, C must be higher than A and D must be higher than B
Trading with ABCD
To find an ABCD on your FOREX.com account, follow these six steps:
- Log in to your FOREX.com account and open a market's chart
- Find AB. Remember that this move must be entirely contained within A and B
- Find BC. This retracement should reach 61.8% or 78.6% of the move from A to B
- Draw CD. Using the AB and BC lines, you should be able to predict where point D will land. CD will usually be equal to AB, and 127.8% or 161.8% of BC in both price and time
- Watch for price gaps and wide-ranging bars in the CD leg. These can indicate that an extension is forming, so CD could be longer than AB
- Trade the potential retracement at D. Open a sell position if you've found a bearish ABCD, or buy if you've found a bullish one