What is the ABC Pattern trading strategy?
The ABC chart pattern is a trend reversal pattern that occurs mostly at the end of trends hinting to the change in the trend direction.
The pattern occurs in such a way that it makes a three-point formation designated as A, B, and C. Interestingly, this pattern has a very high success rate, resulting in the right predictions most of the time.
Formation of the ABC pattern.
The ABC pattern, as we mentioned, mostly forms towards the end of either an uptrend or a downtrend to signify the end of such a trend and the beginning of the opposite trend.
Speaking of an uptrend, the price will make a swing high to a point A, then retrace downwards to a point B – this point is at a lower level than the previous low. An upward price correction will then occur as the price swings to the final point C.
Point C will settle at a level lower than point A where the formation began.
After this upward price correction to point C, then the uptrend is expected to end as a Downtrend begins.
That will have achieved the role of the ABC pattern on an uptrend. The fact that point B lies at a level lower than the previous low and point C lower than the point A where the move began speaks volumes in confirming a downtrend formation.
On a Downtrend, the price will make a swing low to a point A, then retrace upwards to a point B – this point is at a higher level than the previous high. This will be followed by a price correction downwards to the final point C. Point C will come to lie at a level higher than the point A where the formation began.
After the downward price correction to point C, the downtrend is expected to end as an uptrend begins, confirming a change in the trend. This is the role of the ABC pattern on a downtrend. The fact that point B lies at a level higher than the previous high and point C higher than point A where the move began is a sure sign of an imminent uptrend.
Considering how the ABC pattern forms, you must agree with me that it is a very easy pattern to spot. Coupled with the fact that it has a high success rate makes it one very profitable pattern to trade.
Trading the ABC Pattern on Olymp Trade.
We have established how to spot the ABC pattern, as easy as it is, giving emphasis on where each point lies in relation to the others. How then can we transform that ease of identification into profits on the Olymp Trade charts?
Apply the ABC chart pattern to trade on Olymp Trade using the following simple and quick steps;
- Establish the trend direction.
- Identify the ABC Pattern.
- Allow the reversal pattern to prove itself.
- Enter Buy or Sell positions.
- Adjust your Stop Loss.
- Adjust your Take Profit.
We mentioned that the ABC pattern occurs mostly at the end of either an uptrend or a downtrend to signal the reversal of such a trend.
You, therefore, need to identify which direction your trend is headed in order to know the kind of ABC pattern to expect and the signal type.
If an uptrend, you will form a mental picture of how your ABC pattern will look like and wait for a sell signal after it has formed.
If a downtrend, on the other hand, you will also imagine how your ABC pattern should look like and wait for a buy signal thereafter.
2. ABC Pattern Trading – Identifying the ABC Pattern.
Now that you have established the trend direction, you have pictured how your ABC pattern should look like on that trend. Now, wait for it to form considering each point specifications as we described in step 1. Once it has formed you know what signal has been generated and you can then act appropriately.
3. Allowing the reversal pattern to prove itself.
Once point C has been achieved, do not rush into buying or selling. You need to wait as the reversed pattern proves itself worth the investment.
You can do this by waiting for the price to move beyond the level of the point B upwards for a reversed downtrend or downwards for a reversed uptrend.
Remember we said that point B should lie at a level higher than the previous high in an ending downtrend and lower than the previous low in an ending uptrend? If the price then breaks the point, it is a sure indication of a true move towards such a direction.
4. Entering Buy or Sell positions with the ABC pattern.
After the reversed price trend has proven itself, you can then proceed to place your trades appropriately.
If on an ending uptrend, the price has already broken the level of point B downwards, then a Sell signal is triggered. Enter a Sell position with certainty.
If on an ending downtrend, the price has already broken the level of point B upwards, then such is a Buy signal. You need to enter a Buy position immediately.
5. ABC Pattern Trading – Adjusting your Stop Loss.
For your Buy positions, place your stop loss just below point A of the pattern. Stop loss for Sell positions goes just above the point A of the pattern.
Some traders may even place it just below or above point C. However, it is advisable to give the price enough range to move before activating your stop-loss orders.
6. Adjusting your Take Profit.
To estimate the minimum distance you should take your profit, measure the largest height of the pattern. The largest distance is between the highest and lowest points which are A and B. So measure the height between A and B.
After establishing the height between A and B, add exactly the same distance from just below point C for a Buy. Subtract the same from just above point C for a Sell position.
This will give you the point of the minimum amount of profit which you should take. And it has the potential to increase.
Note that you are not adding or subtracting the distance from the point of entry. It is from just below or above point C depending on your position, whether Buy or Sell.
Wrapping Up on the ABC Chart pattern Trading.
A simple pattern to identify and apply indeed. Note the position of each point A, B, and C in relation to the others. If any point is disoriented or goes beyond a level it shouldn’t, then the whole pattern is invalidated.
Accurately apply the ABC chart pattern on your Olymp Trade trading and see the difference it makes in your account.
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