Often times in trading, you, the Trader, end up being your own worst enemy. You end up talking yourself out of taking a position or even worse, talk yourself into taking a position you shouldn’t be. One BIG Bonus to Pattern Trading is that you can easily remove all associated trading emotions by simply following the rules of the pattern you want to trade.
Every Pattern will have rules that define whether the pattern is valid or not. If the pattern is valid, then there are rules to enter and rules to exit the trade. These rules take out all the guesswork and all the emotional setbacks from trying to read the market yourself while opening a position.
The Pattern we are going to talk about today is called the ABCD Pattern and it is the foundational pattern of many advanced patterns.
We are not going to cover all the nuances of an ABCD Pattern right here, right now as there are three variations of the ABCD Pattern and a Bullish and Bearish version of all three. That would leave us 6 patterns to cover while sipping your morning coffee.
Instead, let’s cover the basics of the Pattern.
In the Bearish version of the ABCD Pattern, we are looking for a price movemnt upwards followed by a pullback that can be measured using Fibonacci. The pullback is generally a 61.8 or a 78.6 but there are times when a 38.2 or a 50% fib are respected.
The beginning of the upward move would be your A while the beginning of the pullback would be your B. The end of the pullback would be your C.
AB would also be considered a “leg” and therefore CD would also be considered a leg.
Just as C was either a 61.8 or a 78.6 of AB we look for D to be either a 127.2 or a 161.8 of BC.
The reason why this is a Bearish Pattern is that if all the criteria are met – the Sell Point is at Point D.
Now that’s just the Classic Version of the ABCD. There is also the perfected version called the AB=CD and the Extended version called the ABCD Extension.
To briefly sum up the other two:
AB=CD is when the Length and Time of AB is the same as CD. So if it took 7 days and the price of the asset moved $1 from AB then it would take an additional 7 days and another $1 movement from CD.
In the Extended version, the Length and Time of CD is longer than AB by either a 127.2 or a 161.8 measured with Fibonacci Retracement and Fibonacci Time.
If this is all too confusing for you, don’t worry. We cover more simplified patterns in our lessons and we can always cover more complicated patterns like these in our Live Streams.
The reason we are bringing this up is that Bitcoin is potentially in the midst of setting an ABCD Pattern up and YOU should be looking for that as a potential trade opportunity.
Here we can see that Bitcoin has made an impressive move upward but indeed has a very clear turning point. We can see the pullback is a 56.8% from AB. Now we have three different scenarios that can play out for D.
The AB=CD puts D around $63,135 somewhere around November 9th.
The Classic has already moved beyond the 1.272 and therefore would be targeting a 1.618 anytime between now and November 9th. This would put D around $61,280.
The Extension ABCD could prolong the target time for D all the way to December 9th. The $61,280 stays the same.
Very important – you do need to actually reach the PRZ (Potential Reversal Zone) in order to take this kind of trade.
Of course, if there are other variables at play, such as Volume or Support and Resistance in the area, then those should also be considered before entering a trade.
Targets for an ABCD can be threefold.
Pull a Fib from A to D and the first target will be near the 38.2 with the second at the 61.8. The third target is optional and depending on the prior market structure as well as the macro trend, the TP 3 may or may not make any sense. That being said, TP 3 is a full pullback all the way to A.
These trades are not for everyone but it is certainly something to watch. Once you learn the ABCD then you can eventually take it to the next level with Harmonics. Knowing Harmonics can help you determine which of the three potential exits for the ABCD makes the most sense and where the next PRZ may even be.
Inside of Every Harmonic pattern is an ABCD Pattern. – Cool Stuff.