Patterns in this context are peculiar recurring trends. The common practice is to spot them, make sense of them, and make sure you don’t miss them in the future. The logic behind that is that the collective behavior of the traders on a particular market always returns to making the same decisions.
ABCD stock pattern is one of the market patterns that reflect such common decisions. It’s one of the standard short-term patterns, so it is good to remember it. But remember this: you should judge the situation by more than one parameter as patterns such as ABCD aren’t always right.
How does ABCD look?
If you’re familiar with geometry, you’ll notice that the ABCD pattern sounds like a collection of lines with four points connect these lines. In this instance, the lines create a zigzag shape that ends either with massive elevation or a massive downfall from A to D.
The lines you can draw are hypothetic – you won’t likely see anything like that on a pure market graph. These lines simply show trends – from low to high to low to high (if the overall trend is growing).
Each smaller trend is a collection of candlesticks, most of which move in the same direction (up or down). The ABCD pattern usually takes about 2 weeks for candlesticks to develop, which is why it’s a relatively short-term pattern that can be taken advantage of in a short span of time.
The logic behind
As you can see from the pattern itself, it reflects the general mood of the market:
- At A, it starts to experience a price surge, for one reason or another;
- At B, the traders start to doubt and drop the price a bit. If the pattern is true, BC will be shorter than AB by ½ to ¾;
- At C, another price surge starts to mount, as participants are reassured that the trend is still going. This point must be higher than A but lower than B, otherwise, the pattern is not true;
- At D, the trend ends. CD is usually as long as AB is, although it’s not uncommon for it to be longer. It’s very rarely shorter.
When the trend stops at D, it’s going to enter a reversal. At this point, the price has hit the maximum resistance possible and won’t have more growth. After that, you can expect the price to drop (if ABCD was bullish) or rise (if ABCD was bearish) for some time.
That’s why opening a position at D is the most effective way of working with this pattern, even though no one forbids you to enter earlier.
Finding the exact position of D can be hard, but you only need to enter either right on it or just before the top. On the real ABCD chart pattern, the CD line is almost equal to AB. It can be longer, but almost never shorter. That’s why you can safely draw CD in 1:1 proportion and under the same angle as AB.
However, if you see that the resistance level is not yet reached, you can try to wait a bit longer. But don’t wait too long – once the very first reversal candlestick appears, the number of willing buyers/sellers will increase dramatically, which will in turn increase/decrease the price very fast.
It’s akin to blind climbing – you are welcome to climb as high as you want, but you also need to know where to stop.
In order to use the ABCD pattern in the best possible way, you’ll need several things:
- Tools to measure and draw on the graphs;
- Pivot points;
- Fibonacci tools (optional).
Individual traders use Fibonacci tools to calculate the proportions of the lines. For ordinary trading, however, you can just trust your eye. It’s true that ABCD develops with much greater certainty if the Fibonacci ratios say so. But that’s mostly meant for professionals who aim to maximize profits.
You don’t need that if you’re just looking to raise some profits the smart way, such as this.
You will need to use the pivot points to see when the trend enters support/resistance and generally to better understand the graphs. It’s also pretty optional, but it will increase your efficiency very much if you use this tool.
However, you need to remember that, even though ABCD often develops in the way as described, it may not bring the results you expect. It can simply continue down (or up) the same alley not long after.