ABCD, Master Candle and Other Successful Forex Patterns
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This article will explore some of the key Forex patterns that every professional trader should know about. This article will discuss the importance of trading patterns, and it will investigate several trading patterns in detail, such as the ABCD pattern, the Master Candle, the Three Drives pattern, and more!
Forex patterns are the core of successful price action trading. The key principle of any Forex trading is to keep trading simple. These patterns make use of peculiar market movements, and highlight the chart with different price structures which traders use to trade with. There are multiple trading methods that make use of these patterns in price to find entries, targets, and stop levels. We will discuss simple and effective Forex patterns that have been proven to work throughout Forex trading history.
The ABCD Pattern
This is one of the best performing day trading patterns in the world of Forex. The ABCD Pattern was designed as a day/swing trading strategy. It can be identified on any timeframe, and can be seen in the formation of other advanced patterns. It is the basic and simplest Harmonic pattern, but is nonetheless a very effective one.
Charting the ABCD pattern
Source: MetaTrader 4 - AUD/USD 4 Hour Chart - ABCD Pattern - Data Range: 14 November, 2016 - 6 December, 2016 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Each turning point (A, B, C, and D) represents a significant high or a significant low on a price chart. These points define three consecutive price swings, or trends, which make up each of the three pattern "legs." These are referred to as the AB leg, the BC leg, and the CD leg. AB and CD are known as legs, while the BC is known as a retracement (correction).
We need to use a Fibonacci tool on leg AB (from left to right) and then we will get a BC retracement level. Additionally, one of the best performing ABCD patterns is AB=CD, whereby the length of the AB line should be equal to the length of the CD line. Retracement followed by an extension suggests a higher probability for another retracement to occur. Optionally, the time it takes for the price to go from A to B should be equal to the time it takes for the price to move from C to D
The Three Drives
Source: A graphic illustration of a Three Drives trading pattern
The Three Drives pattern is a 6-point reversal pattern characterised by a series of higher highs or lower lows that complete at a 127%, or a 161.8% Fibonacci extension. It signals that the market is exhausted, and that a reversal is likely to happen.
This pattern is a strong day trading with short-term price pattern, but it is also used as a swing trading pattern. The three-drive pattern is a lot like the ABCD pattern, except that it has three legs (now known as drives) and two corrections or retracements. This pattern is known to be one of the foundations for Elliot Waves.
Source: MetaTrader 4 - AUD/NZD 4 Hour Chart - Three Drives Pattern - Data Range: 25 September, 2015 - 10 November, 2015 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Charting the Three Drives Pattern
- Point A should be the 61.8% retracement of drive 1; optionally 38.2-88.6%
- Point B should be the 0.618 retracement of drive 2; optionally 38.2 - 88.6%
- Drive 2 should be the 1.272 extension of correction A
- Drive 3 should be the 1.272 extension of correction B
- Optionally, the time to complete retracements A and B should be equal
- Valid extension can also be close to 1.272 and higher than 1.272.
The Five 0
One of the more successful Forex patterns that might precede a big market movement is a Five 0 or 5-0 pattern. The 5-0 is both a day trading and a swing trading chart pattern that possesses only two numbers – the 50% retracement of the BC leg, and the Reciprocal AB=CD. The pattern incorporates 5 points within the structure (X, A, B, C, D), and the starting point of the structure (0) can be the beginning of any extended price move. These patterns are profitable both in Forex trading and stock trading.
Source: MetaTrader 4 - EUR/AUD 1 Hour Chart - Five 0 Pattern - Data Range: 24 January, 2017 - 30 January, 2017 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Charting the Five 0 Pattern
- AB movement should be 1.13 to 1.618 retracement of XA
- BC movement should be 1.618 to 2.24 retracement of an AB
- CD movement should be 0.5 retracement of BC
The Master Candle
The Master candle concept is a candlestick charting breakout concept The primary advantage of the master candle is that it is completely bias free, and it allows breakouts without paying attention to the main trend.
Source: MetaTrader 4 - GBP/JPY 1 Hour Chart - Master Candle - Data Range: 21 February, 2017 - 1 March, 2017 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Charting the Master Candle
- Define the MC
- 1st, 2nd, 3rd, and 4th candles within the MC are called 'Setup' candles
- 1st, 2nd, and 3rd candle after the 4th setup candle need to break the MC high/low for the breakout to be valid
- So, those that are 5th, 6th, or 7th candle after MC candle
- Valid Master candle has 30-150 pips range depending on the pair traded
- Buy/Sell entry is placed at 3 pips and spread above/below the MC high/low
The Master candle is solely traded on a H1 time frame and is very suitable for opening range breakout and intraday breakouts. Make sure to practise on demo trades first, before you implement new strategies into your trading system.
The Importance of Trading Patterns
By identifying and trading with these classic chart patterns, you should see more opportunities in almost any market and timeframe. The highest-probability trade setups occur at the completion of the pattern at the confluence, with other important price action tools such as pivot points, and historical levels of support and resistance. By using the ABCD and other patterns, traders could determine risk vs. reward in an easier way, prior to placing a trade. If you would like to learn more about candlestick trading, make sure to read our related articles:
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.