Day trading is intense and requires you to stay in front of your screen for considerable amount of time throughout the day , day trading as opposed to investing is not a buy and forget type of thing , one needs to monitor the stocks continuously looking for change of price action in order to identify the entry and exits of the trades they are going to take , here i present one of the day trading strategies that have worked good for many traders as it is based on the fundamental aspect of price action trading so let us dive into the strategy .
What is ABCD day trading pattern ?
So firstly to make things clear this is not the ABC as in Elliot wave , this pattern has no relation to Elliot wave theory although they both are built on the same price action fundamentals but this one involves much lower time frame and doesn’t interpret the larger trends or change of market trends , the ABCD pattern as suggested by the name and depicted in the Image above shows the pattern of impulse and retracement which can be used to trade the stock intraday for profits , this is a simple and very clean pattern and only involves the basic market trend identification that is the higher high higher low or lower high and lower low pattern , just understand what that is and ABCD is just an obscure name for a wonderful trend identification.
What Time frame to be used for ABCD pattern ?
Although as discussed above ABCD is nothing but the market trend manifesting itself on a technical chart , if bullish in nature then higher highs and higher lows will be formed if bearish then lower highs and lower lows , so although it can be also used for swing trading and position trading but we will be explaining its working that will be beneficial to day traders , so the time frame suggested is the 5 minute and 15 minutes , use these time frames to spot the ABCD pattern and you will not be disappointed .
Logic behind the ABCD day trading pattern –
The is very simple and clean day trading strategy , the stock first makes the impulse move due to some fundamental reason or some catalyst but you should never enter the move at point B because till the stock reaches from the point A to B the stock has run too much and sellers will start creating pressure on the stock hence the stock turns from point B and since we don’t know when this down move will stop we ought to wait for a bullish candlestick pattern or other confirmation that the point C has formed and this is where the buying pressure comes in and the trend resumes , look for rising volumes at point C along with candlestick patterns to make sure this is the point where stock again resumes its days bullish trend , now when the stock crosses B again it is very significant and indicates the formation of higher high which is clear confirmation of uptrend , the point D is where the profit booking should happen , any weakness in the trend and bearish candlestick pattern , resistance levels coupled with oversold RSI or other indications will confirm the formation of point D .
Here you must not forget that point C should never be lower than point A , if C is lower than A it indicates weak trend and the failure of formation of ABCD pattern , day traders can buy at point C itself after confirmation of formation of point C , for more conservative traders or new traders you can buy after the stock crosses B levels again in order to make sure that higher high is formed and trend will move in the direction you anticipated , you will have less reward but also less risk.
ABCD pattern in Vedanta Limited –
As you can see above is the 5 minute technical chart of Vedanta as traded on NSE , India , look how the impulse from point A to B was formed , of course you would have bought at point A but if you missed spotting point A you sure shouldn’t have bought near point B because the sellers started exerting pressure there and formed the retracement wave – the point C , the point C is where the bullish engulfing pattern formed and the volume started rising so you could have bought the next candle after the formation of bullish engulfing and after the stock crossed the former high B again then a trailing stop loss at B levels should have been kept and the trade should have been kept alive till formation of point D , here the conservative traders could even have bought after the point B was broken again from point C and still would have made decent profits but of course that would have given them less risk reward ratio .
ABCD pattern in Apple –
So above is the 5 minute technical chart of Apple Inc. as traded on Nasdaq , USA , look how a strong impulse wave was formed but instead of chasing the stock a smart day trader like you would wait for the retracement in order to enter at much favorable price , the point C was confirmed when a bullish engulfing was formed and the point C didn’t breach the point A , a smart day trader would have bought then keeping the stop loss below the lows of point C and after the stock crossed B again we got a good up move and would have taken profits accordingly at formation of point D, the point C can not only be confirmed by the candlestick patterns or volume but also using fibonnaci levels and oversold levels on RSI or stochastic , remember to trail your stop loss and keep it a B after the B level is again breached from below , there are no hard and fast rules just basic application of technical analysis and price action will do the trick.
Final thoughts on ABCD pattern –
There are several day trading patterns out there and they work very well but one must train themselves in order to identify the right opportunity , ABCD is very good pattern and has been tested by thousands of traders for years but like any other pattern and strategy this can also go wrong sometimes so always keep a stop loss below C levels in order to minimize losses in case the stock fails to manifest the ABCD pattern , trail your stop to level B after B is again broken and only trade this pattern in stocks that have a positive fundamental catalyst in order to increase the chances of formation of the ABCD pattern .