# ABCD Pattern

ABCD Pattern

This is one of the classical and advanced chart pattern module used for the identification of trend.

It shows harmony between price and time and is considered as measured moves.

This pattern depicts the changes in the market direction which suggests us to sell when high and buy when prices come down.

ABCD is classified into three types.

The market trading zig-zag shape activity is probably when the formation with two equal legs labelled AB and CD is expected.

A-B leg

The graph below depicts that, in a upward trending market, the first leg (A-B) occurs when the price rises from A to B.

Number 1: A-B leg

B-C leg

There is change in direction of price at point B and there is backtrack of price steadily to form the B-C leg. Number 2 B-C leg

The retracement (from B to C) can be between 38.2% to 78.6% of the A-B leg.

A retracement of 61.8% to 78.6% is that of an ideal pattern.

We shall see how we use Fibonacci later.

C-D leg

The direction of the price changes again and continues its actual uptrend .

The (C-D) leg deviates upwards, parallel with the A-B.

The C-D leg should be the same in length as the A-B leg when it finishes.

Number 3: C-D leg

AB = CD pattern is equal price and time.

Point D is a Fibonacci extension between 127%-161.8% of the B-C leg.

Point D is the end of the pattern.

Point D can be treated as a selling point. We can also look at selling where the pattern completes.

Going Long at point D in a down trending market is an option as well.

We should understand that, although the AB=CD patterns are common, they are not perfect always.

The Fibonacci tool is applied displaying the retracements and extensions. Let’s look at the perfect AB=CD pattern in the below chart.

How do we trade the AB=CD pattern?

We can find trading opportunity at point D.

Example: An up-trending pattern that we shall use to place a bearish sell trade.

Sell trade in an up-trending AB=CD pattern.

At point D, we place a sell order.

Stop loss is places a few pips above that point.

On reaching D, draw a new Fibonacci retracement from point A to D of the pattern.

Take profit is placed at the 38.2%-61.8% Fibonacci levels.

In a down trending market with a bullish buy trade, we invert the pattern and trading orders in the similar fashion to the above approach.

Entry order

Identify point D where the pattern will finish and place the entry.

Stop loss

The stop loss is placed a few pips above point D.

The C-D leg ends up extending beyond this point. This normally continues further in this direction.

abcd2

Profit target

Technique:

Draw a new Fibonacci retracement from point A to D of the pattern.

This can be done only when the point D has reached prior and the original pattern has finished.

We can place the take profit order at the 38.2%, 50.0% and 61.8% levels.

If we are not sure of which one to place profit target, then it’s better to place at 61.8% level.

It is necessary to note the reaction of the price around the levels.

If we notice that the price battles to break through any one of them, then we can close our trade down and take profit early.

The chart below displays where the sell order, stop loss and profit target is placed.

1 Short entry at the 1.618% extension where AB=CD.

2 Stop loss a few pips above the entry.

3 Take profit option 1 at the 38.2% Fibonacci retracement.

4 Take profit option 2 at the 50.0% Fibonacci retracement.

5 Take profit option 3 at the 61.8% Fibonacci retracement.

Nut Shell

An overview of the lesson discussed so far….

The AB=CD pattern helps us determine the change in price and direction.

This pattern can be adopted to buy when prices are low and sell when they are high.

The pattern consists of three legs, with two equal legs labeled AB and CD.

The pattern derives the name “Lightning Bolt” from the formation of a zig-zag shape with AB = CD.

This can be used in any financial market and on any time frame.

In an uptrend, the first leg (A-B) is formed as the price rises from A to B.

At point B, the price changes direction and backtracks to form the B-C leg – ideally a 61.8% or 78.6% retracement of the price increase between points A and B.

The price then continues its original uptrend , forming a C-D leg which should be the same length as the A-B leg.

At the completion of the pattern (point D), place a sell order and look to profit from a price reversal.

Place your stop loss a few pips above point D.

Draw a new Fibonacci retracement from point A to D of the pattern which is complete.

Take profit at the point where the price will have retraced 61.8% of the distance between A and D.

In a down trending market with a bullish buy trade, we invert the pattern and trading orders in the similar fashion to the above approach.