Using the pattern in conjunction with other technical indicators and strategies can help traders improve the accuracy of their trading decisions. One way to do this is by incorporating the Supply and Demand indicator and the Supertrend indicator. Volume correlates with the prevailing tailwind in either direction of the abcd pattern. If the pattern is moving upward, you want to see strong demand, then weak supply, then strong demand once again.
- For that reason, you can simply use a built-in indicator on your trading platform, set the numbers, and automatically draw the ABCD pattern to a chart.
- With this example, you have the CD forming a perfect bear flag pattern.
- It reflects the common, rhythmic style in which the market moves.
Trying to trade the “C” leg against the trend would be way too risky. It’s a remarkable piece that sets the tone for traders seeking strategic insights. It’s a pattern that belongs to the harmonic pattern family introduced by H.M Gartley. They might be all you need to succeed as a price action trader. If you can’t resist, try setting price alerts and physically stepping away until the right time of day.
AB=CD Entry Point
If the stock looks exceptionally strong, you could sell half at your target and let the rest run. Set an alert for when the stock approaches the top of the A leg in the afternoon. This lets you be ready for breakouts without having to watch every tick. I know I say this time and time again, but you must have all your ducks in a row before jumping into a trade.
If the pattern holds, the trend should reverse at (D), and your short position should become possible. Technical analysts interpret these patterns in an attempt to predict future price movements. The basis of this belief is largely founded in human psychology and herd behavior. 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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However, like the long example, the idea is that once sellers have a «three-wave» move down, it will likely result in a near-term reversal pattern at D. Thus, the classical example of an abcd pattern predicts that in a downtrend «D» is an area to go long. Frankly, perhaps the most challenging part of using the ABCD trading pattern is to draw it on a price chart. Obviously, measuring the numbers independently is not something you can do regularly, and drawing the lines is not ideal as well.
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. The pattern is characterized by an initial spike (A), during which the stock price reaches the high-of-day. This spike is followed by a healthy pullback as profit takers inevitably begin to sell their shares. Once buyers overpower sellers, an intraday low is established (B).
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Ultimately, it creates a zigzag pattern where the D point is the ultimate entry point. But no worries, you don’t need to calculate the lines and Fibonacci ratios on your own. The ABCD pattern is one of the most basic patterns to learn. It requires you to be selective when picking a stock, but it offers a clear risk level. A stock that keeps grinding higher all day is not an ABCD pattern stock. Notice that the minimum target of this ABCD pattern is only half of the total price move from this example.
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That gives us a nice 161.8% compared to the first leg (AB). While this isn’t an exact science, we recommend that you look through the trading simulator for different examples of abcd patterns and measure them to find your best fit. Among the various harmonic candle patterns, it is considered the simplest harmonic pattern of all, but only if you know how to use and trade it correctly. Read on to learn more about the ABCD harmonic chart pattern. These patterns can either be bearish or bullish, depending on their configuration.
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Check off all the boxes of your trading checklist before trading a stock. And since the stock closed fairly strong, traders could have swung this overnight. The stock gapped up the following morning to the $3,730 level. Due to all this, buying the C leg in anticipation of an overnight gap-up creating the D leg was a great setup. It’s also ideal if it’s in a hot sector, has a low float, and has news to boot.
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These distinctive formations form the basis of what we call technical analysis. The harmonic pattern of movement can apply in different market conditions that follow both bullish and bearing swings. With us, you can use the ABCD pattern trading to speculate on the movement of markets like forex, indices, commodities and shares in the short-term. By using the built-in ABCD indicators, we were able to identify this geometric pattern with two Fibonacci rules.
ABCD Pattern Example #1: Clover Health Investments Corp. (NASDAQ: CLOV)
The bearish potential of the pattern is shown with the blue arrow on the sketch above. The third type is when CD is the 127.2%-161.8% extension of AB. There actually are some signs that can hint that CD will be much longer than AB.
As you can probably tell from the visual pattern of an abcd, the CD leg of the pattern looks a lot like a bull flag or a bear flag depending on the context and the trend. In the example we have been using with the SPY chart, this would be a bear flag. Often these look like wedges, flags, or pennants depending on the structure of the pullback.
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 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.