ABCD pattern is probably the most well known pattern among traders. The name often written as AB=CD which totally describes the pattern. AB leg should be equal to CD leg of the pattern. This is the most frequent pattern. If you try any given trading day chances are that you find it at least on few symbols. There are 2 versions of the pattern bullish and bearish. Below are the schematic pictures of the Bullish and Bearish ABCD patterns:
The pattern may happen any time, but most often in corrective moves. The characteristics of the ABCD pattern to look at:
- BC retracement should be 0.618 of AB
- CD extension should be 1.272 extension of BC
- Consequently CD should be equal to AB
Despite being so popular and frequent pattern, it should not be traded on its own. It is often misleading or part of the bigger pattern. The best way of utilizing it is spotting a retracement in trend and waiting for ABCD to finish and entering around point D for trend continuation move. The stop is placed few ticks below/above the farthest possible D level. The safe target lies would be 0.618 of AD move. Many patterns can do much better than that, but the conservative targets must be used to lock in profit and possibly unloading part of the position. Entries might be done with a limit order or on price reversal away from D. All entries must be tested for risk/reward ratio. Entries with low risk/reward has to be taken cautiously or discarded altogether.
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