What is ABCD Harmonic Pattern?
This is a chart used by traders during technical analysis. Traders look to it to identify potential trading opportunities. Two opposing price swings are used to create a harmonic ABCD pattern by dividing them into four parts – A, B, C and D. A combination of Fibonacci ratios determines each of these four parts.
How to trade the ABCD harmonic pattern?
Upon identifying a harmonic ABCD pattern, traders have to decide to hold long or hold short with their trades. Traders will take a long position if the ABCD pattern indicates an uptrend. However, they’ll hold short if the pattern points to a downtrend.
Additionally, a good trader will observe stop-loss levels. Then, they’ll make profit targets in order to maximize their profits and minimize their risk.
How to Identify an ABCD Harmonic Pattern?
To identify an ABCD pattern, start at Point A, which marks the start of the trend. It’s the lowest point in the uptrend or the highest in a downtrend, While point D determines the end of the pattern and is a Fibonacci extension of B Point.
In between, there’s point B which is the end of retracement from point A and point C which is the start of a new trend. There’s the opportunity for potential trades at point D when the new trend’s confirmed.
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Example of an ABCD Harmonic Pattern
We’ll start with a stock that’s trading at $100 per share. This is how a trader will use the ABCD harmonic pattern on a price chart:
- Point A: There’s the first uptrend on the stock’s price. It reaches a high of $110 per share.
- Point B: Then, the stock’s price falls to $105 per share.
- Point C: However, there’s a resumption in the stock’s price uptrend and reaches a high of $115 per share.
- Point D: Then, the stock’s price goes back down again and falls to $110 per share.
Through the above, the trader would’ve identified an ABCD harmonic pattern.