The ABC forex trading strategy is a simple but highly effective price-based pattern that can be used for both forex trading and analysis purposes. It takes advantage of the natural tendency for the price of a currency pair to move in one direction, making several swings, before reversing and swinging in the other direction. Therefore, this pattern can be used to trade trends and reversals. This pattern occurs on all times frames and is utilized in both up and down markets. It can also be applied to the stock and futures markets.
The video below outlines the basic ABC forex trading strategy, including its uses, the pattern, entry points, stop loss and target levels (This video was originally recorded in 2013 by a younger version of myself that was not very well versed at making videos or giving talks, but the information is still relevant).
Figure 1 shows the basic setup for both the ABC long and short forex trading strategy. Profit targets are generally established using a 1.6:1 to 2:1 reward to risk ratio (10 pip stop equals a 16 to 20 pip profit target). These ratios assume you are entering closer to point C than point B. If you enter closer to C than B, usually you can use a 2:1 target, and sometimes even more. If you enter closer to C, the strategy is less effectively, and you will typically want to keep the reward to about 1.6:1. I actively manage these trades, so if the price stalls right before my target I just get out. I don’t want lose my profit once the price is very close to the target.
Source: My broker, FXopen
The Forex Strategies Guide for Day and Swing Traders eBook highlights several ways to get in close to point B so you maximize your potential return. This strategy is not called the ABC pattern in the book, but the pattern is discussed in several sections throughout the book. An ABC is formed any time there is a strong trending waved followed by a smaller pullback. Strategies in the book that are essentially ABC trades are: Engulfing Candles with Trends, Truncated Price Swings, Mini Chanel Breakouts, Trend Channels and often False Breakout and Front-Running. The Strong Reversal Trade is also an ABC pattern.
This is only one strategy and not a complete trading system. For more information on how to develop a complete trading system, and learn when to take and not take trades, please see the eBook. Knowing the basic pattern isn’t enough to trade successfully. Too many of these patterns occur, so we want to focus on the ones that occur during strong trends and that give us one of our valid entry signals during the pullback. To further filter trades, we also want to consider velocity and magnitude and have a good grasp of impulse and corrective waves (to help see the trend direction and differentiate between pullbacks and reversals).
Want to learn how to extract profits from the forex market spending only about 20 minutes each weekend looking for trades?…and collecting daily interest payments while doing it? I have laid out how to do it in the Forex Strategies Course for Weekly Charts, which includes an eBook that covers multiple strategies and four videos to clarify all the concepts. If you have limited time to trade, or just want to potentially increase your passive income (doesn’t interfere with your other trades), this course shows you how to do it.
By Cory Mitchell, CMT
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How to Identify a Trend Change in Real-Time (video) – A look at how to monitor real-time changes in direction.