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.