Latest posts

    Ethereum – Secret bear flag! (70% crash target)

    March 31, 2023

    Bitcoin is retesting a trendline from 2013! (right now)

    March 29, 2023

    Bitcoin – No one talks about this trendline, last wave up!

    March 27, 2023
    Telegram RSS
    • My TradingView
    • Best way to trade futures
    • Best way to trade spot
    • The holy grail of trading
    • The game changer
    Telegram RSS
    Tolberti
    • Home
    • Education
      1. Motivation & Strategy
      2. Technical Basics
      3. Candlesticks
      4. Chart patterns
      5. Indicators
      6. FIbonacci
      7. Elliott wave
      8. Harmonic patterns
      9. View All

      What is drawdown in Trading

      December 2, 2022

      Trading Psychology and its Importance – Tips For a Winning Mindset

      November 2, 2022

      As a trader you need to stay disciplined!

      November 2, 2022

      How to Create a Successful Trading Plan – Step-By-Step Guide

      November 2, 2022

      Price action trading strategies that you need to know

      November 2, 2022

      Support and Resistance – A basic concept of technical analysis

      November 2, 2022

      Technical analysis explained – What is it and how does it work?

      November 2, 2022

      The most common mistakes technical analysts make

      November 2, 2022

      Candlestick Patterns – Complete Guide to Bearish and Bullish Candlesticks

      November 2, 2022

      Rising three methods

      August 11, 2022

      Falling three methods

      August 11, 2022

      Spinning top

      August 11, 2022

      Rising & Falling Wedge

      January 20, 2023

      Bullish Pennant

      January 20, 2023

      Bull Flag

      January 20, 2023

      Head and Shoulders

      January 20, 2023

      OBV – On-Balance Volume

      December 2, 2022

      Market Profile – A Complete Guide

      November 2, 2022

      Ichimoku cloud

      August 18, 2022

      Moving average (MA)

      August 18, 2022

      Fibonacci and Market Analysis

      August 13, 2022

      4 mistakes that Traders should avoid while Trading with Fibonacci

      August 13, 2022

      Why Fibonacci Series is important for Technical Analysis

      August 13, 2022

      A complete overview on trend and theory of retracement

      August 13, 2022

      Elliott Wave Cheat Sheet: All You Need

      August 14, 2022

      Elliott Wave Theory: Complex guide

      August 14, 2022

      Elliott Wave: All About How To Count

      August 14, 2022

      Leading And Ending Diagonal: How To Trade Them

      August 14, 2022

      Alternate bat pattern

      October 1, 2022

      The List of All Known Harmonic Patterns & Ratios

      October 1, 2022

      Cypher pattern

      September 1, 2022

      ABCD pattern

      August 13, 2022

      Rising & Falling Wedge

      January 20, 2023

      Bullish Pennant

      January 20, 2023

      Bull Flag

      January 20, 2023

      Head and Shoulders

      January 20, 2023
    • Technical analysis

      Ethereum – Secret bear flag! (70% crash target)

      March 31, 2023

      Bitcoin is retesting a trendline from 2013! (right now)

      March 29, 2023

      Bitcoin – No one talks about this trendline, last wave up!

      March 27, 2023

      Shiba Inu – 23% crash, best opportunity! (long-term outlook)

      March 25, 2023

      Bitcoin – The bottom is not in! 15k or 10k (careful)

      March 23, 2023
    • Info
      • Crypto news
      • Crypto converter
      • Crypto exchanges
      • My TradingView
      • Best way to trade futures
      • Best way to trade spot
    • Contact
    • My books
    • Join premium channel
    Tolberti
    Home»Education»Harmonic patterns»ABCD pattern
    Harmonic patterns

    ABCD pattern

    By TolbertiAugust 13, 2022No Comments
    Facebook Twitter Telegram WhatsApp Reddit Pinterest Email
    Share
    Facebook Twitter Telegram WhatsApp Reddit Pinterest Email

    Harmonic Patterns are one of the powerful advanced price action techniques that are used to detect reactions. The thing that works about Harmonic Patterns is that they use the confluence method, meaning that they expect reactions from clusters of certain levels defined by Fibonacci retracements. The reason they work has nothing to do with mystic or magic whatsoever, it is simply the fact that Fibonacci retracements are used by many traders and their visibility makes reactions more likely, thus increasing the predictive power of the patterns. However, only using Harmonic Patterns on their own might not be sufficient as we will see below, they are best combined with contrarian indicators to increase the chances of a profitable trade.

    Introduction to the Fibonacci Sequence

    Leonardo Bonacci, known as Leonardo Fibonacci has developed a sequence out of rabbit mating which formed the basis for many mathematical observations. The sequence follows this distinct pattern:

    The numbers are found by adding the previous two numbers behind them. In the case of 13, it is calculated as 8 + 5, hence the formula is:

    The beauty of these numbers is a certain ratio, called the golden ratio. If we take any two successive numbers in the sequence, their ratio (X­n / X­n-1) gets closer to 1.618 which is what we call the golden ratio:

    It is not important how we got to trading from these patterns as much as how important they are, therefore, we will discuss the ratios from a financial trading perspective. Let us keep the 1.618 in mind as for the moment it is one of the two most important ratios that we will use in trading. Our job now is to find the rest of the significant ratios useful to us in trading. They are all variations of 1.618 and its reciprocal 0.618. Notice how the reciprocal of 1.618 is simply 0.618. A reciprocal is when you divide 1 by the number. The below table summarizes the rest of the ratios and how we got them:

    We will now proceed to define the Pattern and how to detect and trade it.

    The ABCD Pattern

    The ABCD pattern is the most basic symmetrical configuration in the market. It is based on a same length wave where a reversal is expected at the end of the second leg. The details of the pattern can be found as follows:

    • A first leg impulsive leg should occur where a retracement is to be expected, preferably 61.8% but not mandatory.
    • The reaction from the first retracement should equal the first leg.
    An example of a bullish ABCD Pattern.

    The figure above shows a powerful reaction after prices reached the potential reversal area which is defined as the end of the CD leg. The CD leg equals the AB leg in amplitude. The advantage of the ABCD pattern is that it is easy to detect and looks like a simple Zig Zag.

    An example of a bearish ABCD Pattern.

    The pattern is always composed of four points in time ABCD where we trade the last point and manage our risk according to specific measures discussed in the last part of the article.

    If you are also interested by more technical indicators and using Python to create strategies, then my best-selling book on Technical Indicators may interest you:

    Detecting the ABCD Pattern

    The ABCD Pattern can start to be detected around mid-way between point C and point D where the market price breaks (or surpasses) the low (or high) of the B point. Therefore, we have enough time to act on it without any hindsight bias or delay. The below plots show how to detect one across time:

    Step one — Detecting the break of the B point.

    Then, we basically calculate the same distance of the AB leg starting from the C point. This will give us the CD leg, the projected reversal level.

    Step two — Awaiting and locking in the reversal zone.

    Having reached close to the D point, the pattern becomes clear and should show clearly the reversal level as outlined in the chart above. All we need is the expected reaction from the D point. And finally, we should manage the reaction according to the risk management measures outlined in the last part of the article.

    Combining the ABCD with the RSI

    Having an ABCD Pattern at its D point (pending reaction) and an RSI around extremes or in divergence is a good confirmation of the trade and is a conviction enhancer. But what is the Relative Strength Index?

    The RSI is without a doubt the most famous momentum indicator out there, and this is to be expected as it has many strengths especially in ranging markets. It is also bounded between 0 and 100 which makes it easier to interpret. Also, the fact that it is famous, contributes to its potential.
    This is because the more traders and portfolio managers look at the RSI, the more people will react based on its signals and this, in turn, can push market prices. Of course, we cannot prove this idea, but it is intuitive as one of the basis of Technical Analysis is that it is self-fulfilling.

    The RSI is calculated using a rather simple way. We first start by taking price differences of one period. This means that we have to subtract every closing price from the one before it. Then, we will calculate the smoothed average of the positive differences and divide it by the smoothed average of the negative differences. The last calculation gives us the Relative Strength which is then used in the RSI formula to be transformed into a measure between 0 and 100.

    Step five — Combining the ABCD with the RSI.

    The above shows that the USDCAD has been diverging with the RSI in a signal that the bearish trend is getting exhausted. Similarly, the RSI is around support at 25% in another bullish confirmation.

    Risk Management on the ABCD Pattern

    Trading on the patterns requires touching the implied reversal zone, also referred to as Potential Reversal Zone — PRZ. A basic rule of thumb that we can follow when trading is to place two targets with the first one being at 38.2% of the top to bottom (or bottom to top) retracement and the second one being at 61.8%. The stop will be placed at half the distance between the entry and the second target thus ensuring a 2.0 risk-reward ratio. I generally take half the profits at the first target and move the stop to breakeven, that way I ensure that the trade never loses money in case the price comes back unfavorably. Below is an example of the simples of Harmonic Patterns, the ABCD pattern showing clear risk management.

    Harmonic Risk Management.

    Conclusion

    Contrarian trading using price action and indicators is a powerful tool to profit from intermediate market reactions. As is known, no strategy is perfect but with proper risk management, a good strategy will last long and provide the expected outcome. We need to always be aware of any fundamentals when trading the patterns on the higher time frame like Weekly charts as we all know, fundamentals are what push prices over the long-term horizon. Also, in the short-term, we need to be always aware of any expected news of economic releases that may induce short-term noise. Technical Analysis does not work when everyone is panicking or hopping on euphoria. It is a tool for normality combined with a slightly statistical extreme.

     

    Share. Facebook Twitter Telegram WhatsApp Reddit Pinterest Email
    Previous ArticleGartley pattern
    Next Article Fibonacci retracement
    Tolberti
    • Website

    Professional trader and analyst. My specialization is in Elliott Wave Theory, Fibonacci tools, chart patterns, candlesticks, and price action. To analyze market structure, I use market profile and volume profile in my trading system. To analyze trends, I use trendlines, VWAP, and simple moving averages.

    Join premium channel
    Join Premium
    Random education
    Candlesticks

    Spinning top

    TolbertiBy TolbertiAugust 11, 20220

    The spinning top candlestick pattern has a short body centred between wicks of equal length.…

    Chart patterns

    Rising & Falling Wedge

    TolbertiBy TolbertiJanuary 20, 20230

    Of all the reversal patterns we can use in the Forex market, the rising and…

    Candlesticks

    Three white soldiers

    TolbertiBy TolbertiAugust 11, 20220

    The three white soldiers pattern occurs over three days. It consists of consecutive long green…

    FIbonacci

    A complete overview on trend and theory of retracement

    TolbertiBy TolbertiAugust 13, 20220

    The direction of the price movement at the given point of time is called a…

    Candlesticks

    Candlestick Patterns – Complete Guide to Bearish and Bullish Candlesticks

    TolbertiBy TolbertiNovember 2, 20220

    Candlestick patterns (also known as “Japanese candlestick charts”) are the indicators that form the basis…

    Random analysis
    Technical analysis

    Stellar XLM – Huge dump is incoming! Falling wedge + triangle

    TolbertiBy TolbertiSeptember 11, 20220

    On the daily/3D chart, we have a pretty strong bearish downtrend. We just hit a brand new…

    Technical analysis

    Bitcoin to 13k next month! Bear flag is breaking down!

    TolbertiBy TolbertiSeptember 14, 20220

    The bear market is really powerful and steep. It appears that with this speed we…

    Technical analysis

    Bitcoin – You must see this!

    TolbertiBy TolbertiOctober 30, 20220

    Bitcoin is the beast! Did you see that green dildo on DOGE? This is what…

    Technical analysis

    PHA – Another explosive move is possible!

    TolbertiBy TolbertiOctober 23, 20220

    This is an absolutely fantastic opportunity on PHA right here, right now! The stop loss for this…

    Technical analysis

    Crypto – 2014 trendline is holding, open your eyes!

    TolbertiBy TolbertiNovember 2, 20220

    This is technical analysis ; I don’t care about interest rates or fundamentals! Leave this analysis if…

    Free technical analysis and education from a professional trader. Go to the "education" section and start learning immediately.

    💡Join my premium channel on Telegram (my trades, signals) - get access.

    ✅ 1 month: 49 USD
    ✅ 4 months: 99 USD
    ✅ 12 months: 149 USD
    ✅ Life Time: 249 USD

    Latest posts

    Ethereum – Secret bear flag! (70% crash target)

    March 31, 2023

    Bitcoin is retesting a trendline from 2013! (right now)

    March 29, 2023

    Bitcoin – No one talks about this trendline, last wave up!

    March 27, 2023
    Get Informed

    Subscribe to Updates

    Get the latest news about crypto, technical analysis and trading.

    Telegram RSS
    • Home
    • Education
    • Technical analysis
    • Info
    • Contact
    • Terms of use
    • My book
    • Join premium channel
    © 2023 Tolberti.com. All rights reserved.

    Type above and press Enter to search. Press Esc to cancel.

    This website uses cookies to give you the most relevant experience.
    Cookie SettingsAccept
    Manage consent

    Privacy Overview

    This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
    Necessary
    Always Enabled
    Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
    CookieDurationDescription
    cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
    cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
    cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
    cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
    cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
    viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
    Functional
    Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
    Performance
    Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
    Analytics
    Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
    Advertisement
    Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
    Others
    Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
    SAVE & ACCEPT