How to trade ABCD Harmonic Pattern
There are three basic steps in spotting Harmonic Price Patterns:
- Step 1: Locate a potential Harmonic Price Pattern
- Step 2: Measure the potential Harmonic Price Pattern
- Step 3: Buy or sell on the completion of the Harmonic Price Pattern
By following these three basic steps, you can find high probability setups that will help you grab good profits.
Let’s see this process in action!
Step 1: Locate a potential Harmonic Price Pattern
I have shown Hourly chart of Ambuja Cement and market the potential harmonic pattern in forming
At this point in time, we’re not exactly sure what kind of pattern that is. It LOOKS like a three-drive, but it could be a Bat or a Crab…
Step 2: Measure the potential Harmonic Price Pattern
Using the Fibonacci tool, a pen, and a piece of paper, let us list down our observations.There are many Amibroker AFL and Software Available which can do the trick for you.
- Move AC is .618 retracement of move AB.
- Move CD is 1.618 extension of move BC.
- The length of AB is roughly equal to the length of CD.
This pattern qualifies for a bullish ABCD pattern, which is a strong buy signal.
Step 3: Buy or sell on the completion of the Harmonic Price Pattern
Once the pattern is complete, all you have to do is respond appropriately with a buy or sell order.
In this case, you should buy at point D, which is the 1.618 Fibonacci extension of move CB, and put your stop loss a couple of points below your entry price.
Is it really that easy?
The problem with harmonic price patterns is that they are so perfect that they are so difficult to spot, kind of like a diamond in the rough.
More than knowing the steps, you need to have hawk-like eyes to spot potential harmonic price patterns and a lot of patience to avoid jumping the gun and entering before the pattern is completed.