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What is ABCD Pattern: The Patterns To Trading Success

Summary

  • The main recognizable feature of an ABCD pattern is that the A to B leg (AB leg) matches the C to D leg (CD leg).
  • The ABCD pattern is a particularly good one to use when first starting trading.
  • For a bullish ABCD, the investor will look to buy at point D. For a bearish ABCD, the investor will look to sell at point D.

Day trading is a real profession and is how many people make money, but trading without a plan or knowledge is not trading at all, it’s gambling. For this reason, all traders will study stock graphs in search of a recognizable pattern to help them predict to a degree, how the stock’s price will develop throughout the day. One of the most logical and consistently repeatable trading patterns available is the ABCD pattern.

abcd trading pattern

What is the ABCD Pattern?

The ABCD pattern is a highly recognizable value pattern that happens in stocks across the globe every day. The main recognizable feature of an ABCD pattern is that the A to B leg (AB leg) matches the C to D leg (CD leg) — in other words, AB ≈ CD. The B to C leg (BC leg) meanwhile, represents pullbacks and consolidation of value. These patterns can go both ways and can thus be bullish or bearish. Depending on which it is, the investor will either buy or sell at the D point.

ABCD patterns are not present in every stock graph, but most investors will argue that if one digs deep enough, they can be found every day. The pattern is predictable and thus considered good to follow to make a profit. However, as with any trade, this is never guaranteed.

Basic ABCD pattern
Basic ABCD pattern (Source: brameshtechanalysis.com)

When To Use The ABCD Pattern?

Thanks to its simplicity and the fact that most other patterns are based on it, the ABCD pattern is a particularly good one to use when first starting trading. It is also what is known as an “afternoon pattern,” meaning that it begins later in the day. The investment entry point usually falls in the 2 PM window, which is understood as being between 1 PM and 3:30 PM. Thus, it is also a great pattern to watch out for if you are a part-time trader, since it falls over lunch.

Tips For Finding The ABCD Pattern

A helpful tip is that alerts can be set on platforms such as Phemex for cryptocurrency trading, or StocksToTrade for other stocks. These can alert you when the stock reaches a value set by you, which is why it is so important to do the research beforehand. Not only will you know when to invest, but you can set the alert to sound when the value reaches the required point, as according to the ABCD pattern. In this way, you will never miss a good investment opportunity.

How To Draw The ABCD Pattern

In the ABCD pattern, each letter represents a significant high or low in the price shown in the stock graph, meaning that it is relatively easy to find and follow. Each pattern leg (from one letter to another) is usually within a range of 3-13 bars/candles. If the range of bars is smaller, this indicates to the investor to look at a longer time period to find the pattern.

When the pattern is located, the Fibonacci retracement tool is used to draw the legs between the different points (A to D). This tool helps identify the support and resistance areas of the bullish and bearish turns as well as measure the legs, thus helping to predict the outcome. It also tells investors when to buy and sell. Knowing that the AB leg should be the same length as the CD leg, an investor can use this tool to pinpoint where the new lows and highs will fall and invest accordingly.

How To Use The Bullish and Bearish ABCD Patterns

Bearish and bullish ABCD patterns
Bearish and bullish ABCD patterns. (Source: freeforexcoach)

When Is An ABCD Pattern Bullish?

For a bullish ABCD, the investor will look to buy at point D. The pattern can be broken down in the following way:

  • A: Point A is at a significant high.
  • B: Point B is at a significant low. Although the stock value may decrease or increase during the AB leg, there can be no point of value higher than A and no point lower than B. This is because to adhere to the ABCD pattern, A and B must be the respective highest and lowest points in the AB leg.
  • C: Point C must be lower than point A but not lower than B. It is known as the second low.
  • D: Point D must be lower than point B. This marks a new low for the value. As with the AB leg, and for the same reasons, there can be no points higher than C and no point lower than D in the CD leg. The investor should look to reach a minimum target profit at point B.

When Is An ABCD Pattern Bearish?

For a bearish ABCD, the investor will look to sell at point D. The pattern can be broken down in the following way:

  • A: Point A is a significant low.
  • B: Point B is a significant high. As with the bullish ABCD, but working in the opposite direction, there can be no points lower than A and no points higher than B in the AB leg.
  • C: Point C must be higher than point A. Again, there can be no highs above B and no lows below C in the BC leg.
  • D: Point D must be higher than point B. There can be no points lower than C and no point higher than D in the CD leg. The investor will sell when the CD leg matches the AB leg.

How To Make Money With The ABCD Pattern?

It is all well and good knowing how to draw the ABCD pattern, but if an investor does not know how to use it, then it has no significance to them whatsoever. Making money using ABCD pattern trading is simple enough and includes basic math. Without doing these calculations first, it can be easy to overestimate/underestimate where your D point will reach in the ABCD chart pattern, and thus your profit.

In these circumstances, an investor will wait too long or jump too soon, thereby missing out on the top-end of the stock’s profit-making capabilities. In such a fast-paced environment as stock trading, this can happen all too fast, so it can be beneficial to set an alert for this one too.

risk-reward management in an ABCD pattern
How to use 2:1 risk/reward management in an ABCD pattern (Source: Sofien Kabaar on medium.com)

Key Considerations

To make money with the ABCD pattern, the following must be considered:

  • The risk: To calculate the risk of an investment using the ABCD pattern, we must first take note of the values of both the A and B points in the chart. For a bearish pattern, the investor should subtract the value of A from B; for a bullish pattern, B from A. This will provide the risk value per share. The risk indicates how much should be considered acceptable to lose, as well as how much an investor should expect to gain. The expected gain should be 3:1 of the risk value, while the acceptable loss should be the risk value per share below the investment per share.
  • When to invest: For a bearish pattern, the investor should measure the AB leg and then use this measurement to compare it to the CD leg. When the legs match, it indicates the best time to buy. For a bullish pattern, the investor should aim to invest at point C.
  • When to sell: For a bearish pattern, the investor should be aiming for a target profit at the B point, however, this can also go higher or lower. For a bullish pattern, the investor will measure the AB leg and sell when the CD leg matches.

Of course, there will be times when the sell point does not reach the expected point, falling short or surpassing it. This is where the investor will make an informed decision based on the market and the risk they are willing to take. This could mean selling at a 2:1 risk to reward as opposed to a 3:1, or if they think it might continue to climb, selling part of the stocks at strength and letting the rest run. The important thing, however, is not to incur heavy losses.

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In addition to the A, B, C, and D points of the ABCD chart pattern, there are two other factors that can help boost the chances of making a profit:

  • Volume: Trading volume can also give good indications of what a stock is going to do. If the trading volume is high, this is a good sign for investors and can be an indicator that the stock will reach or even surpass the sell point. Additionally, if the stock is in a hot sector such as DeFi, has a low float, or has news trending on it, this can push volume and lead to a successful ABCD pattern.
  • Multiday charts: As the ABCD pattern is an intraday pattern, it is also important to look at multiday charts of the asset one wishes to invest in. Look to see if these patterns have emerged in the last few days. Were the ABCD pattern rules followed? Was the expected sell point reached, surpassed, or did it fall short? This information can prove helpful when deciding whether and how much to invest.

How To Avoid Heavy Losses With The ABCD Pattern

The ABCD pattern indicates what the risk is and follows a clear pattern and should therefore be used as a guide on when to sell, either to make a profit or cut losses. This trading pattern has been around for a very long time and is thus well-tested. Of course, there will be times when an exception to the pattern proves the rule, but to avoid heavy losses, it is best to adhere to it.

It is also worth remembering that the value may increase again later in the day. This is another reason that the investor should not run the risk of holding out when the value dips past the investment point plus the risk value. It is never guaranteed that the value will climb again, so selling at the correct point is paramount. If the value does begin to climb again, the investor can simply buy-in later in the hopes that this time the stock will reach the goal and turn profitable. Using this method removes the threat of heavy losses and case permitting offers the opportunity to recuperate those smaller losses and make a profit.

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Conclusion

The ABCD pattern, though varied, is one of the most reliable and established patterns in trading. It can be used for investments in both bearish and bullish trends and gives the information necessary to avoid heavy losses. Although these patterns offer information to the investor, it is still paramount that they do their own research before investing, as markets can be affected by a plethora of external factors.

Nonetheless, the ABCD pattern is a great starting block for new investors and a key that will be used throughout their investing career. Not only that, but as most investing patterns are originally based on this one, it equips the investor with the tools to learn other patterns as well. In the end, though, no pattern is ever 100% accurate 100% of the time, and thus the ABCD pattern is by no means fool-proof and should be used critically.


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