The most basic thing that we learn in school, the ABCs, may prove to be useful when used in financial markets as well. In this case, we are talking about the ABCD patterns that people can look for in various chart patterns.
The ABCD Harmonic Pattern
When we are looking at an ABCD pattern, the AB and CD lines are known as the legs of the pattern, whereas the BC line is known as a correction (or retracement).
You might also think of this as a zig-zag pattern in which the currency pair is trading up or down, and then it has moments of correcting in the opposite direction of the prevailing trends.
Noticing patterns like this may help you decide when to get in or out of your trade, but you need to be absolutely certain that what you are looking at really is an ABCD pattern, and the only way to truly know that is to look for the tell-tell signs such as:
- The AB line needs to be equal in length to the CD line
- The amount of time to for the AB line to form should be the same as the amount of time for the CD line to form.
The Three-Drive Harmonic Pattern
The three-drive pattern is the same as the ABCD line except that it has three legs instead of just two. To find a pattern like this, you will probably want to use a Fibonacci tool to determine if the legs are the same length as one another as they are supposed to be.
You should be able to see this pretty well even with the naked eye, but the Fibonacci tool can help you confirm what you think you are seeing is actually there.
Once the entire three-drive pattern has run its course, then you may be ready to pull the trigger and place your trade to buy or sell the pair.
You are assuming that the ongoing trend is going to continue at this point, and you should put in your trade so that you are ready to take advantage of the continued trend of the market moving forward.