ABCD chart pattern is one of the most powerful and consistent patterns ever used when trading stocks. It is not a secret that not only reading but also spotting trading charts is very important despite the day trader's level. Besides, patterns often appear to be the last straw to count on when handling the volatility of financial markets.
Every pattern acts as the intermediary between the trend and the trader. It is a connector that also reflects the origins of the price move. This is what makes the ABCD chart pattern so special and certainly worth learning. In this article, we will find out what the ABCD pattern is as well as tips to draw and trade with it.
What is ABCD chart pattern?
The ABCD pattern is one of the easiest to spot and identify. It comes with a simple structure that generally consists of only two price legs that are equivalent. The pattern refers to the type of harmonic patterns that are used to define the momentum when the price is going to reverse. The great benefit of the ABCD pattern is the fact that it may serve both bulls and bears, as it shows bearish and bullish price direction changes.
How the ABCD pattern works
It all starts with the initial spike (A), which is associated with a powerful move upwards. During this period, traders are generally very aggressive when buying assets. Such pressure inevitably results in the overbought market and the stock price moving to its day high. As a result, buyers turn into sellers in an effort to sell stocks and pocket the profit. So, a strong pullback follows the initial spike.
When the tables are turned and sales overpower purchases, an intraday low (B) appears on the pattern. It is associated with the rapid price drop. Traders are not recommended to enter the market with either buy or sell order unless they know exactly the depth of the pullback.
The good idea is to sit and wait until the price level will eventually hit the higher low showing its strength usually above the intraday low (point B). The best moment to start planning your future trades is when the price hits the higher low at point C. The point D is the location that traders consider as the locking point in profit.
Why ABCD chart pattern is important
There are several reasons why traders should use the ABCD pattern along with their day trading strategy. They are as follows:
- The ability to spot trading opportunities despite market conditions or timeframes.
- The ABCD pattern is the basis for the majority of other patterns we use every day.
- It helps to compare and contrast rewards vs risks.
- Traders can benefit from high-winning chances as well as solid risk-reward.
- Powerful trading signals result in pattern convergence.
How to trade the ABCD chart pattern
Everything looks very easy in theory. The ABCD pattern works well for both bulls and bears. It shows all the needed info and time when the price is going to change the direction. However, beginners might find it complicated to use the pattern during real-market trading. We are here to help and provide some tips with common trading scenarios that will let amateurs deeper understand how the pattern works.
The following examples are not the only ones. Traders can benefit from many ways of using the ABCD chart pattern.
- Entry Point – the first tip refers to defining the best market entry point using this pattern. All you need is to follow the scanner and stock price moving from point A to point B to its new high of the day. If the support level is formed above point A, we actually have a new support level (C) plotted. It can be used to check if the price consolidates. At this point, traders can enter the market with the anticipation of the price to approach or even rise beyond point C.
- Exit Point – now let's try to identify the best exit point using the ABCD pattern. If you see the price moving below point C, you are supposed to exit the trade. If it only hits the point D, you may not exit the market completely but only sell half of the asset within the current position. Then, sell the remaining position once the price has reached your target level.
These are only a few ways to use the ABCD pattern in the market. Make sure you understand how it works before implementing it as a part of your trading techniques.
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The bottom line
The ABCD chart pattern is a flexible and easy-to-use tool that helps to identify when the price is going to reverse even when it comes to changing the direction for the second time after the trend loses its strength. It works well for both bulls and bears who want to observe a combination of shape, price, and time under a single pattern.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.