ABCD Pattern

Fibonacci ratios are not just used for determining support and resistance levels; they also form the foundation for some significant chart patterns, including the ABCD pattern.

1. What is the ABCD pattern?

2. How to identify the ABCD pattern

3. Extensions of the ABCD pattern

4. Fundamental rules of the ABCD pattern

5. Bullish ABCD pattern (Buy at point D)

6. Bearish ABCD pattern (Sell at point D)

7. ABCD pattern fact sheet

What is the ABCD pattern?

The ABCD pattern is a geometric chart pattern consisting of three consecutive price swings. This pattern resembles a diagonal lightning bolt and often signals a potential trading opportunity.

It is a highly useful pattern as it reflects the rhythmic movement typical in financial markets. The ABCD pattern consists of four key points on the chart:

• Point A: A new trend begins to form.

• Point B: The market experiences a retracement.

• Point C: The initial trend resumes.

• Point D: A further correction that offers a trading opportunity.

This pattern can be applied for both buying and selling and is effective across various markets (forex, stocks, commodities, and more). It works in all market conditions (ranging, bullish, or bearish trends) and is suitable for any time frame.

Example of a bearish ABCD pattern:

Markets naturally tend to repeat the ABCD pattern, which can often be observed in trading charts.

Example of a repeating ABCD price pattern

In this example, you can observe that some patterns converge, creating a stronger trading signal compared to individual standalone ABCD patterns.

How to identify the ABCD pattern

To identify the ABCD pattern, traders focus on the movements between its points, often referred to as "legs." The AB and CD legs represent movements in the direction of the main trend, while BC serves as a corrective retracement.

Each leg typically lasts 3 to 13 bars. If you encounter an ABCD pattern where the legs extend beyond 13 bars, it may be helpful to switch to a longer time frame to verify whether the pattern aligns with the trend or Fibonacci levels.

Once you believe you’ve identified an ABCD pattern, the next step is to apply Fibonacci ratios. These ratios help confirm the pattern's validity and determine where it is likely to complete. This is crucial for timing your trade entry accurately.

Classic ABCD pattern

In a classic ABCD pattern, the BC leg should represent a retracement of 61.8% or 78.6% of the AB leg. By applying a Fibonacci retracement to the movement from A to B, you should observe that BC ends near one of these levels.

Alternative ratios

In strongly trending markets, the BC retracement may be smaller, approximately 38.2% or 50% of AB.

Following this, the CD leg should extend to 127.2% or 161.8% of BC. If you identify a bearish ABCD pattern, the CD leg represents a suitable level to open a sell position. For a bullish ABCD pattern, point D may be an optimal entry point for a buy trade.

Extensions of the ABCD pattern

Occasionally, you may come across a variation of the ABCD pattern known as the extended ABCD pattern. In this scenario, the CD leg is significantly longer than the AB leg, specifically extending by 127.2% or 161.8% of the AB leg's length, rather than being proportional to BC.

Visualization of the Extended ABCD Pattern:

In this model, the extension is evident in the elongation of the CD leg, which creates a distinct trading opportunity compared to the classic pattern.

Basic rules of the ABCD pattern

When identifying and validating the ABCD pattern, it is essential to follow a set of rules to ensure accurate recognition.

Key rule:

Ideally, the time and length of the AB and CD legs should be approximately equal—unless dealing with an extended ABCD pattern.

Additional rules:

• A to B: The market should not exceed the levels of points A or B.

• B to C: The market should not go beyond points B or C.

• C to D: The market should not surpass points C or D.

Specific rules for bullish and bearish patterns:

Bullish ABCD pattern:

• Point C must be lower than A.

• Point D must be lower than B.

Bearish ABCD pattern:

• Point C must be higher than A.

• Point D must be higher than B.

Adhering to these rules helps traders accurately identify valid ABCD patterns and distinguish between classic and extended versions, increasing the success rate of trades based on these models.

Bullish ABCD pattern (Buying at point D)

The ABCD pattern is a valuable indicator for traders seeking entry opportunities during trend corrections and recoveries. To identify a bullish ABCD pattern, it is crucial to follow these rules and steps:

1. Identifying the AB Leg:

• Point A: Represents a significant high and serves as the starting point of the move.

• Point B: Indicates a significant low, marking the first major drop.

• Rule: During the movement from A to B, there should be no highs above point A and no lows below point B.

2. Finding the BC leg:

• Point C: Must be lower than point A, signaling a correction upward.

• Rule: During the movement from B to C, there should be no lows below point B and no highs above point C.

• Fibonacci ratios:

• Ideally, the BC leg should retrace 61.8% or 78.6% of AB.

• On strongly trending markets, BC may only retrace 38.2% or 50% of AB.

3. Drawing the CD leg:

• Point D: Must be lower than point B, indicating a new market low.

• Rule: During the movement from C to D, there should be no highs above point C and no lows below point D.

• Completion levels for point D:

• The length of CD can equal AB.

• CD can measure 127.2% or 161.8% of AB.

• CD can measure 127.2% or 161.8% of BC.

• Time completion for point D:

• The time for CD can equal the time for AB.

• CD can take 61.8% or 78.6% of AB's time.

• CD can take 127.2% or 161.8% of AB's time.

4. Validating the pattern:

• Convergence of factors: Look for a combination of Fibonacci levels, trend lines, and other indicators to confirm the pattern.

• Wide candlesticks or price gaps: Notice significant price movements in the CD leg, especially near point D.

5. Interpretation:

• Point D as an entry point: Traders can consider point D as an entry point for buying, anticipating an upward trend.

• Extensions at 127.2% or 161.8%: These levels can signal a strong continuing trend if prices extend to these levels.

Visualization of the chart

The following chart illustrates a simple example of a bullish ABCD pattern:

• AB leg: Depicts the initial market decline.

• BC leg: Shows the market correction upward, ending below point A.

• CD leg: Represents the final decline, completing below point B.

• Point D: Highlights an opportunity to enter the market, expecting an upward trend.

This chart aids traders in understanding the structure and rules of the bullish ABCD pattern, emphasizing the points where the most profitable opportunities may arise.

Bearish ABCD pattern (Selling at point D)

The bearish ABCD pattern represents a structure of movements on a financial chart, signaling a potential selling opportunity at point D. This formation is based on Fibonacci ratios and provides critical cues for traders.

Example Breakdown:

1. Identifying the AB Leg:

• Point A: A significantly low price.

• Point B: A significantly high price.

• Movement from A to B: No lows below point A and no highs above point B.

2. Finding the BC Leg:

• Point C: Must be higher than point A, indicating a retracement upward.

• Movement from B to C: No highs above point B and no lows below point C.

• Fibonacci ratios:

• Ideally, BC will retrace 61.8% or 78.6% of AB.

• On strongly trending markets, BC may retrace only 38.2% or 50% of AB.

3. Creating the CD Leg:

• Point D: Must be higher than point B, signaling a new high.

• Movement from C to D: No lows below point C and no highs above point D.

• Length of CD:

• CD may equal AB.

• CD may extend 127.2% or 161.8% of AB.

• CD may extend 127.2% or 161.8% of BC.

Key steps for trading the bearish ABCD pattern

• Fibonacci levels: Observe the Fibonacci retracements and extensions to confirm the pattern.

• Trend convergence: Look for alignment of trends and other confirming signals near point D.

• Price action signals: Watch for prominent candlesticks or price gaps near point D, which may indicate a strong trending market.

This pattern is a valuable tool for identifying selling opportunities, particularly in markets showing clear trend extensions and retracements. By following these steps, traders can better position themselves to capitalize on bearish market movements.

Based on the chart, a sell position is optimal at point D, with Fibonacci levels providing additional confirmation. Ensure that each step in the analysis is carefully followed as depicted on the chart.

Based on the chart, a sell position is optimal at point D, with Fibonacci levels providing additional confirmation. Ensure that each step in the analysis is carefully followed as depicted on the chart.

Overview of the ABCD pattern