How to identify the ABCD pattern?
There are both bullish and bearish versions to each pattern. Bullish patterns indicate higher chances to buy or go “long.” Bearish patterns can identify opportunities to go “short” or sell.
Each point (A, B, C, and D) represents a significant high or low on a price chart. These points define three consecutive price swings or trends, which make up each of the pattern’s three “legs.” These are referred to as the AB leg and CD leg. BC is known as retracement (correction).
Trading is not exact science. Therefore, the proportion between AB and CD can be calculated using some key Fibonacci ratio relationships. By doing so, we can get an approximate range of where the ABCD pattern may end, both in terms of time and price. This is how converging patterns help to increase probabilities, allowing traders to determine entries and exits more accurately.
Within any given timeframe, each pattern leg is generally within the range of 3-13 bars/candlesticks, even though patterns may be much larger than 13 periods within a given timeframe. Traders may interpret this as a sign to move to a larger timeframe in which the pattern does fit within this range to check for trend/Fibonacci convergence.
There are 3 types of ABCD patterns (each with a bullish and bearish version) in which specific criteria/characteristics must be met.