Do you know why beginner day traders should learn the ABCD pattern? If you don't, I'm going to 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 it's not our fault.
With so many choices, you're practically shamed into having your own special order. If "170 degrees" is possible, anything is!
Why Beginner Day Traders Should Learn the ABCD Pattern
Unfortunately, the Starbucks phenomenon can and does 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, use MA's, EMA's, what about Bollinger Bands? Someone mentioned something about Fibonacci - that sounds like pasta to me.
I wonder if the moon or the tides have any effect on the market? What the heck is a candlestick? And what about this hanging man formation or three crows?
What is one to do? In an attempt to prevent you from feeling like you need to create your own special trading strategy or hang yourself, here's one chart pattern beginners should focus on when they first start day trading: The ABCD Pattern.
Check out our free stock trading courses for more information on what to do and how to trade.
One High Probability Day Trading Pattern: ABCD
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 most uncomplicated patterns to trade is the ABCD Pattern.”
For beginners, one of the most basic and most 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-day as buyers are aggressively buying.
Inevitably the buyers will want to take profits, so they begin to sell their shares. We end up seeing the spike, followed by a healthy pullback. And once buyers overpower sellers, an intraday low is established (B) as the price comes down.
You should still not enter the trade as you are not sure 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's established - which is now support at (C), we begin planning our trade with our risk at B.
In short, we are planning for the stock to break above point A, and we consider taking profits at point D.
Stock market training is important in order to be a successful trader.
How to Trade The ABCD Pattern
- When my scanner alerts me that a stock is surging up from A and reaching a new high of 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 bring my stop higher.
- Once my target is hit, or I sense momentum is waning (i.e. price makes a new low in the 5-minute chart), I sell my remaining position.
Why Is the Pattern so Important?
- 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
- 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)
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 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.
One thing to keep in mind: whatever your strategy is, it definitely doesn’t mean you’ll be successful trading it. At Bullish Bears, we understand this.
We want to whittle your 80,000 options down to 5. Stock trading is not an exact science, but Bullish Bears will help you unravel the unknown.
Learn the essentials in our free online trading courses. Then you can put everything together and be a great trader. Thanks for reading our ABCD Pattern post and stay tuned for most material focused on patterns and price action for 2020.