What is the ABCD chart pattern and how do you trade with it?
The ABCD trading pattern is one of the easiest harmonic patterns to recognise on a price chart, indicated by a four point movement. Learn how to trade when you identify the ABCD pattern.
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What is the ABCD trading pattern?
ABCD trading pattern is a trend that stocks take in the market, observable on price charts. The sequence of events follows a particular harmonic pattern in market movement that can be helpful to traders in predicting future price swings.
The harmonic pattern of movement can apply in different market conditions that follow both bullish and bearing swings. With us, you can use the ABCD pattern trading to speculate on the movement of markets like forex, indices, commodities and shares in the short-term.
The harmonic pattern develops at any period over time, and you can follow the behaviour of the market by observing price charts. The sequence follows the pattern below:
- The stock represents a price high, then falls
- Is a move lower from A
- The stock price moves higher from B but falls short of A
- The stock price drops lower than B
It’s important to remember that you shouldn’t use the ABCD trading pattern in isolation when speculating on future price movements. Your positions should be supported by extensive technical analysis and fundamental analysis.
How to trade or invest using the ABCD pattern
To trade or invest using the ABCD pattern, you have to identify the indicator, conduct further research and then set your trading alerts. Remember that the chart pattern develops across different timeframes, and you’ll need to observe trading charts over the short, medium and long term as part of your research.
Before you get started, it’s important to note that the pattern can manifest on both bullish and bearish trajectories, depending on trader’s entry point.
- Decide whether you want to trade or invest
- Choose your preferred market
- Create an account or practise on a demo
- Set your trade size and manage your risk
- Open your position and monitor your trade
Spot the indicators
Identifying the indicator on a price chart is the first step to opening your position. Multiday charts generally offer insight into the behaviour of stocks and markets over an extended period of time.
You’ll be able to track previous price intervals and compare them to trade volumes at certain times to zero in on the best entry point. Many traders prefer to watch ‘hot’ sectors, with around-the-clock news coverage, and high peaks and low troughs.
Once you’ve conducted thorough research and composed a sound trading plan, it’s important to exercise patience and discipline. When monitoring your position, you should be confident in your trading strategy, despite experiencing an extended upward or downward swing in the short-term.
Set trading alerts
You can set trading alerts to receive a notification when the market conditions change from the A leg of the cycle so that you don’t miss an opportunity to take a position. Remember that you shouldn’t rely on signals and alerts to inform you of how your trade is going – it’s your responsibility to monitor your position.
Prepare for the exit point
You need to anticipate the final leg ( D ) of the cycle. This is when the price movement comes close or breaks the risk level you set. You’ll exit your position by selling the stock.
An example of trade using the ABCD pattern
A recent example that displayed the progression of the ABCD pattern is the FTSE 100 Cash Index.
Following the initial drop from point A to B, the price rebounded to point C. Point C is a lower higher than point A. The move from point C to point D provides another move lower with point D being lower low than point B.
Traders of the harmonic pattern might look for price reversal at point D, to trade with the expectation of a short term rebound on the index.
Common mistakes in ABCD pattern trading
There are common mistakes that people make when trying to gain exposure to a market using ABCD pattern trading. These could include:
- Taking a position too early and the level has not yet been consolidated
- Assuming there’s an ABCD pattern where there isn’t one
- Low volume when the pattern is forming
- Holding your position too long without setting up suitable risk levels and missing the exit point
Before you implement the strategy, you should familiarise yourself with resources on how ABCD patterns work. You can go through our online trading courses on IG Academy to learn more about technical analysis and chart patterns. Alternatively, head over to our dedicated forum, IG Community – ABCD pattern to discover how other fellow traders have fared using the trading strategy.
What is the ABCD trading pattern summed up
- An ABCD trading pattern forms when there’s a trend that stocks follow in the market, making the harmonic pattern noticeable on price charts
- You can use the pattern to discover the entry and exit points in a market whether its bearish or bullish
- You’ll need to conduct thorough research and support the ABCD trading pattern with technical analysis and fundamental analysis
- It’s important to do your due diligence on how ABCD pattern works so that you avoid common mistakes
- You can gain exposure to different markets using ABCD pattern by trading CFDs and spread bets or investing via our share dealing platform
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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