In this paper, analysts Hannes Brinklert, Elsa Kellerman, and Robert Skoglund provide an extended analysis of the harmonic trading patterns known as the ‘ABCD pattern’ on the FX market. The paper is an extension of two previous LINC reports covering the same pattern. The underlying hypothesis is that the ABCD pattern can be used as an indicator of a coming price reversal, with the intention to capitalize on the predicted price reversals by taking a long- or short-position indicated by a bullish- or bearish-signaling ABCD pattern respectively.
The scope of this project has been to test and analyze three unique harmonic trading strategies in the FX market. The analysis explores whether the geometric properties and the relative position to days’ opening price of detected ABCD pattern can be correlated with higher returns. Based on this, an optimized trading strategy is hypothesized and back-tested. The analysis was done on a three-year period of 1-minute Open-High-Low-Close (OHLC) data across six different G10 currency pairs.
More than 2000 ABCD patterns were detected on the three-year interval, obtaining win-rates over 50% and positive returns for nearly all strategies and currency pairs. The optimized trading strategy based on conclusions from the analysis, however, did not generate any significant improvements when back-tested, concluding that the filtering technique was unsuccessful in extracting the most profitable trades. The actual usability of the pattern could be further analyzed to investigate whether the price reversal is imminent in such a way that it agrees with theory.
To read the full report, please see attached PDF below: