What is the ABCD chart pattern and how do you trade with it?

What is the ABCD trading pattern?

The ABCD trading pattern is a trend that stocks take in the market, and it is observable on price charts. The sequence of events follows a particular harmonic pattern in market movements, that can be helpful for 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 predict the movement of markets like forex, indices, commodities and shares in the short-term.

The harmonic pattern can develop at any period over time, and you can follow the behaviour of the market by observing price charts. The sequence follows the pattern below:

1. The stock reaches a price high and then declines
2. A move lower occurs from point A
3. The stock price moves higher from point B but falls short of reaching point A
4. The stock price drops lower than point B

It’s important to remember that you should not use the ABCD trading pattern in isolation when predicting on future price movements. Your positions should be supported by extensive technical analysis and fundamental analysis.

How to trade using the ABCD pattern

To trade using the ABCD pattern, you have to identify the indicator, conduct further research, and then set your trading alerts. Remember that the chart pattern can develop across different timeframes, and you will need to observe trading charts over the short, medium, and long term as part of your research.

Before you get started, it is important to note that the pattern can manifest on both bullish and bearish trajectories, depending on the trader’s entry point.

1. Choose your preferred market
2. Create an account or practise on a demo
3. Set your trade size and manage your risk
4. 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 insights into the behaviour of stocks and markets over an extended period.

By analyzing previous price intervals and comparing them to trade volumes at certain times, you can pinpoint the best entry point. Many traders prefer to watch ‘hot’ sectors, with around-the-clock news coverage, and exhibit high peaks and low troughs.

Learn more about swing trading indicators

Remain disciplined

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 do not miss an opportunity to take a position. Remember that you should not solely rely on signals and alerts to inform you of how your trade is going – it is your responsibility to monitor your position.

Discover how to set trading alerts

Take a position

Depending on the trajectory of the swing, you will choose a point of entry ( C ) after the stock breaks its high. Remember to take suitable steps to manage your risk, like setting up a stop order to limit your potential loss.

Learn how to take a long or short position

Prepare for the exit point

You need to anticipate the final leg ( D ) of the cycle, Which occurs when the price movement comes close or breaks the risk level you have set. You will exit your position by selling the stock.

Learn more about our range of trading charts and indicators

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, which formed a lower higher compared to point A. The subsequent move from point C to point D resulted in another downward movement, with point D forming a lower low compared to point B.

Traders observing the harmonic pattern might look for a price reversal at point D, trading 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 may include:

• Taking a position too early before the level has consolidated
• Assuming the presence of an ABCD pattern when one does not exist
• 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 is a trend that the 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 will need to conduct thorough research and support the ABCD trading pattern with technical analysis and fundamental analysis
• It is 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^*

^*CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.