The XABCD is a harmonic chart pattern used by traders to predict the end of an existing trend and the beginning of a new one. Combined with Fibonacci retracement levels, XABCD chart patterns are considered among the most powerful patterns in technical analysis.
In this article, we’ll explain what XABCD harmonic patterns are, show you the different types, and help you find ways to identify and use these patterns in your forex trading.
What is the XABCD Candlestick Pattern?
Developed by Harold McKinley Gartley, the XABCD is a trend reversal pattern with five separate points (XABCD) and four legs (XA, AB, BC, and CD). The pattern can be a bullish pattern or a bearish pattern, and, in any matter, it indicates that the price action is about to reverse.
The XABCD is the base of all other harmonic patterns in technical analysis. There are four major XABCD patterns:
Each pattern has similar formations and rules; however, each pattern also has specific Fibonacci ratios. Therefore, these five-point chart patterns are divided into two groups depending on the location of the D point – extensions or retracements.
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How to Identify and Use the XABCD Pattern in Forex Trading?
One of the flaws of XABCD chart patterns is that it’s not easy to spot and identify them. As mentioned, the XABCD pattern is based on the Fibonacci sequence and ratios. There are different ratios for each type of XABCD pattern, which obviously makes it very hard to remember the numbers and absorb this information.
One way to identify XABCD patterns is to use harmonic scanners, although you’ll have to pay a fee for using this service in the vast majority of cases. Otherwise, if you insist on finding a XABCD pattern on your own, you basically need to identify the pattern and use the XABCD built-in indicator on your trading platform (the XABCD harmonic pattern is available on MetaTrader4).
If the pattern is bullish, then the shape of the letter M is formed. For a bearish XABCD pattern, you’ll notice a formation of the letter W.
You can see what a bullish XABCD carb pattern looks like in the chart below.
Keeping the above in mind, here are the key factors you need to remember when using XABCD harmonic patterns.
- Identify the XABCD formation
- Use the XABCD indicator to draw the five separate points and four legs – XA, AB, BC, and CD.
- Add Fibonacci retracement levels and additional trend reversal indicator – RSI, MACD
- Enter a position at the D point when the trend reversal begins
- Set a stop-loss at the X level (for the Bat and Gartley patterns)
- Take profit should be placed at or below the A level (for all XABCD patterns)
How to Trade Forex Using the XABCD Candlestick Pattern – Strategies and Examples
The XABCD patterns can work at any time frame and on any instrument. However, drawing the pattern manually in a trading chart is almost impossible as each pattern has many ratios. Luckily, most charting platforms these days allow you to add the pattern automatically as a built-in indicator.
Below, we are going to show you how to draw the XABCD harmonic pattern, find the right entry-level, set a stop loss, and take profit targets.
1. Drawing the XABCD Harmonic Pattern
The first step is to draw the XABCD pattern on a price chart. Once you’ve identified the pattern, you can navigate to the indicators menu on your charting software and automatically draw the pattern by stretching the lines from X to A, A to B, B to C, and C to D.
The EUR/USD daily chart below shows how the XABCD bearish Gartley pattern is formed with five points and four legs. Using the software XABCD indicator, we automatically drew the pattern into the chart.
2. Find Entry Level Using Momentum Indicators
One of the good things about XABCD harmonic patterns is that you get a precise entry-level, which is the D level. This is the price area where the potential reversal zone occurs, and the trend is about to reverse.
Still, even though this pattern provides a clear entry-level, it’s always best to add other indicators to confirm the reversal. In the chart below, we used the MACD indicator and Fibonacci retracements.
In this case, the ideal entry-level for this trade is at the 38.2% Fibonacci level when the MACD crossover occurs.
3. Set a Stop Loss and Take Profit Target
Finally, you need to set a stop-loss order and find the ideal take-profit target. Once again, one of the critical advantages of the XABCD pattern is that it provides a well-defined stop loss and take profit target. In general, stop loss should be located at the X level; however, take note that this applies to the Gartley and Bat patterns only.
For the Butterfly pattern and the Crab pattern, you’ll have to use Fibonacci retracements to locate a stop-loss order.
Take profit is located at the C level, A level, or below (when used with Fibonacci retracements).
As you can see, we placed the stop-loss order at the X point. As for taking a profit – because the C and A levels are relatively close to the entry-level, we used Fibonacci levels from the lowest level of the prior trend to the X level. As seen in the chart, this provides you with several options to place a take-profit order.
The XABCD Pattern – Pros and Cons
These are the most common pros and cons of trading the XABCD pattern:
- If used correctly, XABCD patterns are highly accurate
- It can be used in combination with other chart patterns and technical indicators
- The XABCD harmonic chart pattern is a relatively complicated chart pattern to understand and use
- Stop-loss placement is not well defined on all XABCD harmonic patterns (For example, crab and butterfly)
- May conflict with Fibonacci ratios
To sum up, here are the main points to know about XABCD harmonic patterns:
- The XABCD is the base of harmonic chart patterns with five points and four legs. These five points and four legs connect to form chart patterns
- There are four major XABCD chart patterns – Gartley, Butterfly, Crab, and Bat
- To trade XABCD patterns, you need to draw the pattern on your trading software by using a built-in indicator
- Entry-level should be at the D point. Stop-loss is placed at the X level (for the Gartley and Bat patterns) and take profit at the C, A levels or below at the following Fibonacci levels
How reliable and accurate are XABCD harmonic patterns?
By using golden geometry shapes, XABCD patterns provide visual formations that often repeat themselves. Clearly, these patterns are not always accurate, and it isn’t easy to learn how to use XABCD patterns in trading. However, suppose you succeed in drawing these patterns correctly; in that case, XABCD patterns are among the most accurate charting patterns in technical analysis (according to some financial experts, these patterns have an accuracy rate of 80%-90%).
How do you use a XABCD pattern?
Like most other chart candlestick patterns, you first need to identify and draw the XABCD pattern on a price chart. However, as we mentioned, it will be a challenge to calculate and draw the XABCD pattern on your own. This obviously takes time and effort, and remembering the details of each pattern is not an easy task. Luckily, these days, you can find many charting platforms that enable you to draw the pattern automatically by using a built-in indicator. Therefore, once you identify one of the XABCD patterns, you simply need to draw the pattern on a trading chart and follow the rules and guidelines we mentioned in this article.
Which timeframe is best for trading XABCD harmonic patterns?
Trading XABCD patterns usually works best on medium to long-term time frames. These include a 1-hour chart, 2-Hour chart, Daily/weekly/monthly chart.
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