Day trading is all-around identifying patterns on stock charts, and there is no concept more essential for beginner traders than ABCD patterns trading. This pattern appears frequently on stock charts and is easy to spot if you know what you are looking for. More importantly, it will help you better manage your buy and sell times. It can also instill reliance in your trading decisions.

There are no “right things” in day trading. But trading ABCD patterns is one of the most reliable indicators for decision making because it is a product of fundamental market principles in action.

What Is the ABCD Pattern?

As the name suggests, the ABCD pattern is the four-step sequential behavior of a stock that can be seen on its chart. It consists of three sequential price swings (A, B, C) and a buy/sell action (D). This type of pattern can appear in any period, in any market. This is how it works:

1. The stock hits an initial price spike and then falls.
2. The stock establishes a new intraday low.
3. The stock reaches a new support level.
4. The stock breaks point A.

The up and down movement of stocks can seem chaotic to novice traders. However, setting highs, lows and support levels gives traders an idea of how the stock will perform in the future. This is a good indicator of when to enter or exit a position before the price rises or falls again.

There are three types of ABCD patterns that use both bullish and bearish trajectories: AB = CD, classic ABCD, and extension ABCD. Some rules govern each pattern, but the principle is the same for everyone: price swings with measurable consistency. What changes in the time frame or how quickly does the stock reach key levels in the ABCD pattern?

How to Trade Harmonic Patterns?

Harmonic patterns can be a little difficult to detect with the naked eye, but once a trader understands the structure of the pattern, they can be relatively easily spotted with Fibonacci tools. Primary harmonic patterns are five-point patterns (Gartley, Butterfly, Crab, Bat, Shark, and Cypher). Three-point (ABC) or four-point (ABCD) patterns are embedded in these templates. All price fluctuations between these points are interconnected and have a harmonic relationship based on Fibonacci. 

The patterns are either formed or have completed structures in the shape of "M" or "W" or a combination of "M" and "W" in the case of three drives. Harmonic patterns (5 points) have a critical start (X), followed by an impulse wave (XA) followed by a corrective wave to form an “EYE” at point (B), ending the AB segment. This was followed by a trend wave (BC) and finally, the correction phase (CD) ended. The critical harmonic relationship between these legs determines whether the model is a retracement or extension-based pattern, as well as its famous Gartley pattern, butterfly pattern, crab pattern, bat pattern, shark pattern, and cypher pattern. One primary point to spot is that all 5-point and 4-point harmonic patterns have built-in ABC (3-point) patterns.

All 5-point harmonic patterns have related principles and structures. Although they differ in the ratio of leg lengths and the location of the key nodes (X, A, B, C, D), once you understand one pattern, it will be relatively easy to understand the others. This can help traders use automatic pattern recognition software to identify these patterns, rather than using them with the naked eye to find or force patterns.