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What Is Abcd Pattern


Traders use ABCD patterns to make an informed decision about potential turning points in the market. 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. Periods of low trading volumes and consolidating ranges are not ideal for the ABCD.

time frame

Another thing that you need to do is use a stop loss. For example, if you’re trading with a stop loss of 10 pips, you’ll only lose 10 pips if the market doesn’t move in your favor. Convergence of several patterns—within the same timeframe, or across multiple timeframes–provide a stronger trade signal.

pattern trading

The ABCD pattern helps give traders a framework for where to risk and enter their trades. This prevents chasing a stock and getting shaken out in the midday pullback. The lines AB and CD are called “legs”, while the line BC is referred to as a correction or a retracement. In addition to buying the breakout, many traders will look for a popular moving average like the 20ema.

Candlestick patterns around point C are very helpful. An ABCD pattern completes only if the price is reversed from point C. Harmonic patterns have gained a lot of momentum lately. Since their appearance in 1935, many patterns have undergone some refinement. The inclusion of Fibonacci ratios and projections have added more detail to the specifications. This was one of the primary goals of this article — to shed some light on the perfect ABCD pattern.

Day Trading Gaps and Windows

If a stock is creating a «BC» leg into resistance at a moving average like the 20, it could signal an entry. The breakout would then become an add-on entry point, as seen in the example above. In order to draw the ABCD pattern for day trading, you will need to identify the first leg from A to B. Once you identify this first leg, you can then anticipate the B to C pullback.

  • Then, when the initial move is complete, you want to make sure that the BC pullback isn’t too strong, otherwise, you might have a «V bottom» reversal pattern.
  • Not only are they the connection between trends, but they are also at the origin of all major price moves.
  • An important thing to realize about harmonic patterns is that we can derive the likely extension levels depending on the retracements in the first steps of the formation process.
  • Depending on which it is, the investor will either buy or sell at the D point.
  • This was one of the primary goals of this article — to shed some light on the perfect ABCD pattern.

More conservative will wait to see if the price moves above point C. Both types of traders commonly place an initial stop loss order a little below point D. The bullish version of the pattern, which signals the end of an existing downtrend, is simply the bearish version flipped upside down.

Once the starts moving up from point D, a buy position can be opened. Stop Loss is set just below point D, and the landmarks for profit-taking are points C, A, and above if there is a strong upward movement. More aggressive traders will initiate a short sell trade very near point D, with an initial stop-loss order placed a bit above point D. More conservative traders will wait for further confirmation of a trend change shown by prices falling below point C before making a short entry into the market. When trading reversals with the ABCD, its standing as a harmonic indicator requires that guidelines for completion of retracements and legs be established.

Your Exit Strategy

In this article, we will take a closer look at what the ABCD pattern is, how to identify it and what are the benefits of using it. One of the best ways to read an abcd pattern, or any pattern in trading, is to pay close attention to the volume signature that accompanies the pattern. The pattern is characterized by an initial spike , during which the stock price reaches the high-of-day.

We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. What this tells us is that supply or demand is coming in strong to create the initial move. Then, when the initial move is complete, you want to make sure that the BC pullback isn’t too strong, otherwise, you might have a «V bottom» reversal pattern.

This will help you catch potential afternoon breakouts. If you can’t resist, try setting price alerts and physically stepping away until the right time of day. So, for every ABCD setup, consider whether that’s a reasonable target. You may want to buy every ABCD breakout, but know that if the midday pullback is large, the risk/reward at the breakout level will be poor. Traders usually enter an ABCD pattern at the breakout over morning highs.

The best apps for stock charts support a wide range of technical analysis features like charts, pattern recognition and drawing tools. 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. 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 matches the C to D leg — in other words, AB ≈ CD. The B to C leg meanwhile, represents pullbacks and consolidation of value.

risk management

By the time the whole three-drive pattern is complete, that’s when you can pull the trigger on your long or short trade. As you can see from the charts above, point A should be the 61.8% retracement of drive 1. Similarly, point B should be the 0.618 retracement of drive 2. If you use the Fibonacci retracement tool on leg AB, the retracement BC should reach the 0.618 level.

ABCD Pattern: Definitive Trading Guide

Highest probability trade entry is at completion of the pattern . Providing you with the most comprehensive charting tools and a reliable platform with fast execution. Many risk contrary traders don’t trade if this retracement from B to C is more than 50% of AB. Should seek the advice of a qualified securities professional before making any investment,and investigate and fully understand any and all risks before investing. Set price alerts just below the morning highs of each candidate.

Depending on the trajectory of the swing, you’ll choose a point of entry after the stock breaks after the high. Remember to take suitable steps to manage your risk, like setting up a stop order to limit your loss. On a bearish ABCD, you might choose to enter a sell position at this point.


It is also worth remembering that the value may increase again later in the 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. For more information about the FXCM’s internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms’ Managing Conflicts Policy.

Bullish ABCD Pattern Rules

Due to its overall structure, traders look for the highs and lows when trading the ABCD pattern. Moreover, a useful way to trade the pattern is to combine it with the zig-zag indicator. The indicator can draw price highs and lows, so traders can easily spot the ABCD pattern.

Copyright © 2023 LLC. All rights reserved. Also, the time to complete retracements A and B should be equal. Our gain and loss percentage calculator quickly tells you the percentage of your account balance that you have won or lost. In our crypto guides, we explore bitcoin and other popular coins and tokens to help you better navigate the crypto jungle. In this particular case, we have a perfect bullish reversal candle in the form of a hammer candle.

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