What is the ABCD chart pattern and how do you trade with it?
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How to Use the ABCD Pattern
ABCD pattern is the simple way to execute a sell put or the buy option
Follow the thumb rule of ABCD pattern that explains the drawing of the geometric patterns and depending on the extension of the CD leg and the trend it forms, either buy or sell stocks.
Remember !
Fibonacci ratios do form the basis for the identification of resistance/support levels.
The same fibonacci ratios are applicable, and they form to be the key elements in defining ABCD patterns.
What Is all About the ABCD Pattern?
It is a chart pattern that represents three consecutive price swings. It forms the picture of a diagonal lightning bolt.
Fundamentally, it is a combination of four points, A,B,C,D forming three lines, with variations representing buy/sell positions.
Cutting across the various segments of stock trading like Forex, Commodities, Stocks, etc, these price swings relate different conditions like trends, and range bound, regardless of the timeframes.
From Point A, a new price trend forms, then the prices in the market retraces at B, and the trend again resumes at C. Further, the price goes for the next correction at D, here you can trade.
In the set example, you can find a pattern where in the trading signals keep on forming the ABCD pattern in isolation.
ABCD Pattern Rules:
As the prices move from A to B, the market is expected to be within range bound A & B.
Likewise, the same should be applicable for the prices moving from B to C, and C to D.
In the bullish moves, the ABCD pattern must have point C at a level lower than A, and D must be at a level lower than B.
In the bearish moves, the ABCD pattern must have point C at a level higher than A, and D must be higher than B.
How to Buy/Sell Stocks Using the ABCD Patterns?
Do open the market chart and find AB, likewise find BC.
Make sure that the retracement should reach 61.8% or 78% of the move from A to B.
By making use of AB, and BC lines you are expected to draw the CD.
Remember, a general principle, CD must be equal to AB. Moreover, CD must be 127.8% or 161.8% of BC, in terms of price and time.
Observation:
You must consider the CD leg and measure the price gaps and wide ranging bars, these shall indicate about the formation of an extension. Therefore, you can find the CD to be longer than the AB.
You will find a retracement at D, for a bullish ABCD market buy stocks, and for bearish ABCD then open a sell position.