ABCD Pattern is one more Harmonic Pattern that is used to predict the potential pattern and thus helps in forming a trading strategy for the successful Forex traders and investors. Larry Pesavento gave this concept of ABCD Pattern to the Forex world. The nickname of the ABCD Pattern is given the “Lightening Bolt”. Gartley described AB=CD in his Gartley Pattern and this shows how the Forex market would flow upwards in uptrend and after reaching a point, the price will start retracing. After retracing to some extent, the market would again rally in another uptrend. This rally will again be followed by another retracement. So one rally is followed by one retracement and when this procedure is repeated twice then a parallel channel (AB = CD) is formed on the chart as shown in the figure below.
ABCD Pattern Structure
AB=CD Pattern can give excellent signals if used with the other trading tools. AB=CD Pattern can be seen on all time periods of the Forex Trading market. This pattern shows the equality between the third side and the first side. There are four sides that form this pattern. The first side is AB that is moving up or down as in the uptrend or downtrend. So after the first side completes then a correction or retracement occur that will take support or face resistance at any one of the Fibonacci levels such as 0.382, 0.50, 0.618 or 0.786. Now this correction or retracement is named as BC and is second side of the pattern.
Retracement of 0.382 will only be seen if the market is in strong trend. The third sides is again upwards or downwards price movement according to the uptrend or downtrend till and this shows that the third side is equal to the first side and if the CD side is again extended then it may not be exactly equal. After identifying the formation of the third side, predictions can be done and a trading strategy can be formed because the pattern will signal the traders whether or not to enter the trade. Alert signs may include the wide range bars, tail of the pattern closes in an opposite trade direction and gaps near the finish point of the CD side.
When it is an invalid AB=CD Pattern ?
The traders and investors must also be able to understand if the Forex pattern is valid or not. The signs of an invalidate AB=CD pattern are given below.
C must not exceed A that means the retracement cannot be more than 1.
If Retracement is 1 then the pattern is valid but rarely found.
D must exceed B to complete the pattern at D.
Look at the figure below.
A correctly formed AB=CD pattern will make the prediction work easier for traders and investors and thus they can form more effective trading strategies.