Do you know why beginner day traders should learn the ABCD pattern? If you don’t, I will give you an analogy to help explain. Did you know that Starbucks offers more than 80,000 drink combinations?
Or worse yet, have you been in line at Starbucks and not even bat an eye at the person in front of you ordering a grande, skinny, half-fat, soy latte at 170 degrees? You know something’s wrong when you don’t.
Sadly but surely, we’ve all become so accustomed to the hyper-customization Starbucks offers, and we don’t believe that it’s our fault.
With so many choices, you’re practically shamed into having your special order. If “170 degrees” is possible, anything is!
What Is an ABCD Pattern?
Unfortunately, the Starbucks phenomenon can creep over when new traders try to pick a day trading strategy. With so many choices, you’re overwhelmed before you get started.
Should I trade off VWAP and use MAs and EMAs? What about Bollinger Bands? Someone mentioned something about Fibonacci – that sounds like pasta to me. I wonder if the moon or the tides affect the market. What the heck is a candlestick? And what about this hanging man formation or three crows?
What is one to do? To prevent you from feeling like you need to create your special trading strategy or hang yourself, here’s one chart pattern beginners should focus on when they first start day trading: The ABCD Pattern.
High Probability Trading Pattern
The following setup tends to emerge in the market at some point on many, but not all, days. By learning to recognize this trading setup, a day trader may take actions that could improve their chances of seeing a profitable return.
“For beginners, one of the most basic and uncomplicated trade patterns is the ABCD Pattern.”
For beginners, one of the most basic and uncomplicated patterns to trade is the ABCD Pattern. And from my experience, ABCD patterns have an extremely high probability of occurring in any stock, and I see them everywhere.
The ABCD pattern starts with a strong upward move – initial spike (A), during which the stock price reaches the high of the day as buyers aggressively buy.
Inevitably, the buyers will want to take profits, so they will begin to sell their shares. We end up seeing the spike, followed by a healthy pullback. Once buyers overpower sellers, an intraday low is established (B) as the price decreases.
You should still not enter the trade as you are unsure where the bottom of the pullback will be.
At this point, we are looking for the stock to show strength by setting a higher low (above point B) on the next dip. Once this higher low is established – which is now supported at (C), we begin planning our trade with our risk at B.
In short, we plan for the stock to break above point A and consider taking profits at point D.
Importance
- Reflects the standard, rhythmic style in which the market moves.
- It looks like a lightning bolt on the price chart, which makes it easy to spot.
- A leading indicator that helps you determine where and when to enter and exit a trade.
- It helps to determine the risk/reward before placing a trade
- Helps identify trading opportunities in any market (forex, stocks, options, futures, etc.), on any time frame (intraday, swing, position), and in any market condition (bullish, bearish, or range-bound markets).
ABCD Pattern Trading Strategy
- When my scanner alerts me that a stock is surging from A and reaching a new high of the day (B), I wait to see if the price makes a support level higher than point A. If it does, I call this new support level C.
- I wait and watch the consolidation period.
- If the stock holds support at C, I enter the trade as close to the price of C as possible. I hope that the stock will move up or even surpass point D.
- I stop out and exit the trade if the price goes lower than point C. Remember how I mentioned in step 3 to buy as close to C as possible? That was so I could minimize my losses.
- When the price reaches D, I sell half of my position and increase my stop.
- Once my target is hit or momentum is waning (i.e., the price makes a new low in the 5-minute chart), I sell my remaining position.
ABCD Pattern Example
The ABCD Pattern can be regularly found on many heavily traded stocks. Take this $NUGT chart, for example. You can see that patterns are forming within the ABCD pattern here. Bull flags, double tops, cups, and handles make up the price.
This example turned into a large rising wedge pattern, which turned into a large falling wedge pattern. Knowing these patterns will be key if you give yourself the best overall odds of success trading.
Check out this hourly ABCD pattern on CGC – TradingView has a built-in tool for drawing ABCD patterns! Note that these patterns resemble bull flags and often turn into rising wedge patterns. Many times, preceding this pattern will be falling wedges, which you’ll notice in this example.
Final Thoughts on the ABCD Pattern
Why don’t you start day trading with simple patterns that make sense, like the ABCD pattern? It is simple, easy to understand, and useful for day trading.
Avoid complicated trading strategies with mathematical formulas or calculations that involve geometry or statistics. And even with powerful indicators, the most successful traders never forget the basics: Keep it simple.
Remember that whatever your strategy is, it doesn’t mean you’ll be successful trading it.
