STRATEGIES

What Is an ABCD Pattern?

  • Reflects the common, rhythmic style in which the market moves
  • A visual, geometric price/time pattern comprised of three consecutive price swings, or trends—it looks like a lightning bolt on price chart
  • A leading indicator that helps determine approximately where and when to enter and exit a trade

Why Is the ABCD Pattern Important?

  • Helps identify trading opportunities in any market (forex, stocks, futures, etc.), on any time frame (intraday, swing, position) and in any market condition (bullish, bearish, or range-bound markets)
  • All other patterns are based on (include) the ABCD pattern
  • Highest-probability trade entry is at completionof the pattern (point D)
  • Helps to determine the risk/reward priorto placing a trade
  • Convergence of several patterns—within the same time frame, or across multiple time frames--provides a stronger trade signal.


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So How Do I Find an ABCD Pattern?

Each pattern has both a bullish and bearish version. Bullish patterns help identify higher-probability opportunities to buy, or go “long.” Bearish patterns help signal opportunities to “short,” or sell. 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, 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.


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Trading is not an exact science. As a result, we use some key Fibonacci ratio relationships to look for proportions between AB and CD. Doing so will still give us an approximate range of where the ABCD pattern may complete—both in terms of time and price. This is why converging patterns help increase probabilities and allow traders to more accurately determine entries and exits.

Each pattern leg is typically within a range of three to 13 bars/candles on any given time frame, although patterns may be much larger than 13 periods on a given time frame. Traders may interpret this as a sign to move to a larger time frame in which the pattern does fit within this range to check for trend/Fibonacci convergence.

There are three types of ABCD patterns (each with a bullish and bearish version) in which specific criteria/characteristics must be met:

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