This is when the price movement comes close or breaks the risk level you set. Each turning point (A, B, C, and D) represents a significant high or significant low on a price chart. These points define three consecutive price swings, https://www.bigshotrading.info/blog/abcd-pattern-in-trading-learn-to-use-it/ or trends, which make up each of the three pattern “legs.” These are referred to as the AB leg, the BC leg, and the CD leg. The ABCD pattern is a visual, geometric chart pattern comprised of three consecutive price swings.
The next counter-trend C trade would have also been very profitable (No. 4). It is relatively easy to see a trading pattern, but the challenge comes in trying to fully automate the process. Not only did ABCs and extremes have to be programed, but a trend confirmation signal had to be integrated. That way there was little chance of a trader inadvertently entering a counter-trend and therefore a riskier trade. To accomplish this task, a green vertical bar appeared under the price bar once a new uptrend was confirmed, and a magenta bar over the price bar when a downtrend was confirmed.
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The easiest way is with the help of special tools – indicators or chart assistants, such as ZUP and Autochartist. It requires a minimal amount of trading capital while providing the possibility of a much larger profit if point D does turn out to signal the beginning of a new primary trend. A second advantage that the pattern offers is a trade entry with clearly defined and limited risk. Running an initial stop-loss order just on the opposite side of point D gives traders the chance to take a low risk trade. If a stock’s very choppy or putting in more volume than the A leg during this period, it’s best to skip it. It might be a sign that there are a lot of short sellers fighting the buyers.
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- With this example, you have the CD forming a perfect bear flag pattern.
- More conservative traders will wait to see if the price moves above point C.
- Check off all the boxes of your trading checklist before trading a stock.
If that’s the case, even if the stock breaks out, it might get stuffed right after. I know I say this time and time again, but you must have all your ducks in a row before jumping into a trade. Ignore the stock if there’s a lot of resistance overhead or if it has one-and-dones. It is built from the time of the last leg in the zone from 1.38CD up to 2.681CD. But even in such case we can not only avoid losses, but even make some profits. As we see in the chart above, of all the targets we marked, only point PPZ1 worked out.
Example of trading the bullish ABCD pattern
But remember, you set your risk at the bottom of the B leg. So, if the breakout’s too far away from the bottom of the B leg, it might be best to skip the trade entirely. Buying the C leg before the high-of-day breakout typically doesn’t work. The stock gapped up over 15% at the market open the following day.
Volume tends to be high as the pattern is forming (hence the action) and consolidated as the trend culminates. If there’s low volume when the pattern is forming, that’s a red flag. The pattern might not be the result of regular trading action.
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With that in mind, let’s see two examples of the ABCD pattern – bullish and bearish. There are a number of combinations and permutations of the ABC https://www.bigshotrading.info/ pattern. In this case, the equity put in an extreme followed by an A from which a conservative long trade (first green arrow) could have been made.
A stock that keeps grinding higher all day is not an ABCD pattern stock. However, as this pattern works in any timeframe, it will be a good additional tool to your trading strategy. Let’s look at one more example of Starbucks Corporation on 16th Dec ’21.