ABCD Pattern - the Day Trading Pattern
By Stelian Olar, Updated on: Jan 18 2024.
The ABCs were fun to learn as a kid, but as a trader, they can make you some serious money.
The ABCD pattern is one of the most popular harmonic trading strategies and can help you profit from predictable price swings in the stock market. If you want to invest in the stock market successfully, you need to understand key chart patterns like the ABCD stock pattern.
This simple, yet powerful setup marks trend reversals like a pro as they are the “bigger brother” of the ABC pattern.
Also known as the AB=CD pattern, it only requires four turning points in a price chart. You start with a strong price move (A to B), then a correction (B to C), and finally another leg (C to D) that matches the first in length and time. Plot the Fibonacci retracement and extension levels between these swings to validate your pattern and you’re done.
Is as simple as that!
If you want to ace stock investing, you need to know your ABCDs.
Whether you’re a beginner wondering what is an ABC pattern or an experienced trader seeking new ABCD pattern day trading tactics, this article is for you.
This comprehensive guide will teach you all about:
- The pattern ABCD and A B C pattern.
- How to utilize it for ABCD pattern trading.
- You’ll learn how to spot these popular candlestick patterns and use the Fibonacci retracement tool to validate them.
- We’ll cover real ABC pattern examples and actionable ABCD pattern trading strategies.
By the end, you’ll be an expert at trading harmonic patterns like the ABCD patterns. Let’s start from the basics and work our way up to real-world ABCD trading pattern strategies.
The journey starts now - let’s master the ABC of the stock market!
What is the ABCD Trading Pattern
The A B C D pattern is a popular harmonic pattern that forms frequently in technical analysis and it consists of two equal price legs (hence the AB=CD leg) separated by a retracement. This unique pattern forms across all time frames and all financial markets (forex, stocks, cryptocurrencies, ETFs, mutual funds, etc.) consisting of a zigzag movement with upward and downward legs.
Essentially, the setup consists of four key swing points labeled A, B, C, and D or three consecutive price swings (two impulsive moves and one corrective move):
- It starts with a strong trending move from point A to B. This leg AB kicks off the pattern as prices start swinging.
- Followed by a retracement from point B to C,
- Then another impulsive wave from point C to D,
- And finally, a second correction from point D.
Plotting the Fibonacci retracement tool between these A B C D swings validates the structure.
Traders mainly use this reliable chart formation to predict impending reversals or continuations well in advance. Whether you want to apply ABCD pattern in trading breakouts, catching tops and bottoms, or just analyzing overall market direction, the ABCD chart pattern can improve your technical analysis.
How to Identify the ABCD Trading Pattern
Spotting a proper ABCD trade pattern setup begins with detecting the pattern's four legs correctly. The most critical components are the initial impulse wave leg AB and the final swing CD. These two price legs will adhere to the harmonic ratios derived from Fibonacci numbers.
Start by identifying a strong price swing on the higher timeframes – this will form your AB swing wave. The move should last for at least 3 candlesticks but not more than 13 candlesticks. Next, look for a healthy pullback or correction that will give you point C.
Apply the trading ABC indicator with your retracement tool between A and B to gauge BC.
ABCD Fibonacci Ratios
In a standard stock ABCD pattern, BC will be either:
- 61.8% or 78.6% of the AB,
- 38.2% or 50% of the length of AB – for strong trading markets.
Measure CD once the second leg is completed and confirm it matches AB in both price and time.
For CD projections, use the Fibonacci extension levels of 127.2%, 161.8%, 200% or 261.8% to validate the ABCD forex pattern.
There you have it!
With some practice, you'll be able to spot potential stock ABCD pattern setups quickly but make sure you pay special attention to the harmonic ratio alignments between the swings to avoid bad trades.
Are ABCD and ABC Patterns the Same Thing?
It's a common misconception that the ABC pattern trading and ABCD pattern are identical chart formations used in technical analysis, though they share similarities, there are distinct differences traders should recognize.
First, let’s see what is ABC pattern in trading and how it compares to the ABCD pattern.
The core of both setups is a 3-swing harmonic sequence reflecting a trend, retracement, and continuation. Plotting the Fibonacci retracement tool between these swings gives reversal levels to watch.
However, the ABCD has an extra leg for added confirmation – point D completes the pattern structure only when it aligns with Point A in price and time which creates precise trade setups based on the 1.27 extension of BC.
Number of points
Upward and downward
Upward and downward
Continuation or reversal
The ABC lacks this confluence and final leg.
Key features of ABC trading:
- Point A: Start of an upward trend.
- Point B: Peak of the upward trend.
- Point C: Retracement point, typically between 50% and 61.8% of the AB leg (using Fibonacci retracement levels).
Traders mainly use the ABC pattern stocks to highlight potential longs at C, because it is more of a continuation signal rather than a reversal indicator like the ABCD pattern in trading.
So, while these ABC pattern examples embody similar harmonic concepts, the ABCD pattern offers higher probability setups.
Hopefully, this clarifies the difference between ABC and ABCD pattern strategies for you.
ABCD Chart Pattern vs Three Drives Pattern
The ABCD pattern and three drives pattern are two harmonics that often get confused by novice traders, but if you want to master these setups, their key differences must be understood.
As the name suggests, the 3-drive pattern consists of three consecutive price swings labeled as drives, interrupted by two pullback corrections. Per the Fibonacci sequence, Drive 2 will be 61.8% of Drive 1 and Drive 3 aims for a 127% measured move.
The main advantage of the ABCD patterns is it forecast reversals much faster through the three precisely aligned legs while the 3-drive pattern allows the predominant trend to extend further before signaling exhaustion.
So in summary, the 3 drives pattern catches counter-trend bounces while ABCDs trade breakouts in the direction of the overall trend and reversals. Knowing what each one forecasts is vital for timing high-probability entries.
How to Trade the A B C D Pattern
Now that you know how to spot the ABCD pattern Forex, let’s discuss high-probability methods for trading the ABCD. Whether you apply this trading pattern in forex, stocks or crypto, the basic rules remain the same across markets.
Many traders wait for the ABCD chart formation to fully form before taking positions, which means waiting patiently for the price to hit point D after the B to C retracement and set entry orders just at point D.
Stop losses belong above (below) the high (low) created at point D since a break past there would invalidate the trading signal. The trail stops lower as the trend reverses post D while the profit targets can be set using 1.272 or 1.618 extensions of the initial A to B leg.
For aggressive day trading the ABCD, initiate positions at C with wider stops at B and a price target at the Fibonacci extension levels of 127.2%, 161.8%, 200%, or 261.8% where point D may end. This allows earlier entries but requires quicker action to lock profits if the pattern fails. Always use other technical tools like moving averages to confirm momentum.
Mastering these day-trading ABCD pattern strategies takes screen time.
However, the payoff is reliable signals with defined trade location and risk management rules.
Common Mistakes in ABCD Pattern Trading
The ABCD stock chart pattern is simple in theory but tricky in real-world application. Even seasoned traders make mistakes analyzing these stock ABCD setups. Here are some of the most common errors:
- Not confirming D completion with Fibonacci - Failure to properly measure CD using extensions of BC often leads to premature entries.
- Ignoring invalidation rules - Don't ignore it if the price closes back above the B high after a bearish pattern emerges.
- Forgetting about risk management - Having no stop loss or profit-taking strategy means giving back gains from winning trades. Define your risk parameters before entering any ABCD setup.
- Trading against the higher timeframe trend - A bullish ABCD pattern in a downtrend is less likely to succeed than if framed by an uptrend so, make sure to always assess the higher timeframe context.
- Not waiting for confirmation - Entering at the very first sign of an ABCD pattern forming leads to frequent stops. Wait for a clear break/close past C or D before triggering orders.
Mastering any chart pattern requires learning from mistakes.
Now that you know what to avoid, implement good ABCD stock trading habits.
Now that you know how to properly identify these high-probability ABCD patterns and avoid common mistakes, it's time to put it into practice. Head over to Pepperstone and get for Free your demo account to enjoy award-winning trading infrastructure for your ABCD trading. If you’re based in the USA, try eToro.