ABCD Pattern Part 1: Double Bottoms

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We find the root of technical analysis in the systematic study of repetitive patterns in the historical price record. In the previous article, I explored key aspects of this discipline, such as its history and the fundamentals of its creation. Today, I will focus on a specific pattern, which I like to call the ABCD pattern, and specifically show its logic and practical uses for detecting entries in double bottoms. If my contribution is well received, I will soon show other variants.

ABCD is a basic price action structure; what would be an impulse (AB), a retracement (BC), and the continuation of the impulse (CD).

Historical Background

Classic authors such as R.N. Elliott, Goichi Hosoda, and Alan Andrews dedicated decades to the study of impulsive and corrective waves in the markets. Specifically, the ABC pattern (composed of an impulsive segment and a corrective one) has been a pillar in these theories. For R.N. Elliott, Fibonacci ratios were essential to predict future fluctuations in his Elliott Wave Theory. Alan Andrews developed his own tool, known as the Andrews Pitchfork, and Hidenobu Sasaki contributed to the popularization of Goichi Hosoda's methods in the 1990s, showing how his mentor used measurements to project waves and corrections.

As a contemporary reference, we have Scott M. Carney, a pioneer in harmonic trading. His methodology, inspired by the ideas of Elliott, W.D. Gann, J.M. Hurst, and H.M. Gartley, seeks to predict probable reversal zones in price action through Fibonacci ratios. Carney popularized the AB=CD pattern as a four-point structure where the initial segment (AB) partially retraces (BC) and then completes with an equidistant movement (CD), allowing the identification of entry opportunities at market extremes. This pattern, along with its alternate variants, forms the basis of his approach in books like The Harmonic Trader, where he emphasizes the convergence of ratios to maximize trading precision.


Let’s Keep It Simple: Description and Psychology of the ABCD Pattern

It is extremely harmful to memorize tricks, formulas, and patterns while discarding understanding. Price charts are, above all, a psychological phenomenon. Forgetting this, at best, would be underestimating our greatest advantage as technical analysts.

After investors profit from an impulsive wave (AB), at some point many will take partial or full closes of their positions, triggering a correction (BC). Once the price resumes its impulse in the direction of the prevailing force (CD), the eyes of many participants will be on the next correction or inflection point (D).

There are many psychologically attractive zones for taking partial position closes, and a Fibonacci extension is a useful tool, but there are so many implications of each ratio that investors will often feel overwhelmed by so much information.


Practical Use in Double Bottoms

Figure 1.1


In Figure 1.1, I show what would be a bearish impulsive wave making a correction. The horizontal lines show the zones where the price can approximately change direction, forming a double bottom.

Instead of memorizing and aligning Fibonacci combinations, I recommend detecting ABCD patterns over the zone, which will increase the effectiveness of our market entries. As confirmation, we will wait for a high-volume entry and a candle pattern that shows strength (false low, bullish engulfing candle, bullish hammer with a large wick or shadow).

A false low occurs when the price falls below the price action and bounces upward with force, leaving a wick or shadow at the bottom of the candle and an elongated body at the top (preferably without a wick or shadow), indicating strong rejection by buyers.

Figure 1.2


In Figure 1.2, we can observe a real example of the ABCD pattern application in corrections. Our lower line of interest is the one that truly confirms a double bottom thanks to a notable volume entry and an engulfing candle pattern.

It is necessary to train our eyes to volatile scenarios, quite unlike those we would find in books.

Figure 1.3


Figure 1.3 shows the scenario of an ABCD pattern at our first line of interest. Generally, the first line of interest will be around the 0.786 Fibonacci retracement zone, while the second line of interest is a bit more imprecise, but volume will tend to provide solid confirmation of buying strength.

Figure 1.4


Figure 1.4 shows in more detail how, over the zone of our first line of interest, we find a notable increase in volume. In this case, our entry confirmation would come from a false low.


Why is the second line of interest more imprecise to calculate than the first line of interest, but one of my favorites?

When the price reacts strongly below what would be a support zone in a double bottom, we are generally facing a bear trap, a scenario of extreme volatility.

Many bears who entered expecting the continuation of the downtrend will be forced to capitulate in the presence of strong buyer entry. This, added to the capitulation or partial closes of sellers who had positions taken previously, generates a scenario of extreme bullish volatility. I especially like these formations because of the notable volume presence that precedes them and the bullish force unleashed afterward.


Trade Management and the Importance of Break-Even

A Stop Loss (SL) adjusted below the zone where a bullish candle shows us strength will be extremely necessary in this type of formation, but it will be equally useful to understand that we want to use the force in our favor in the safest way possible.

A scenario where we ensure we don’t lose a penny will be psychologically comfortable, so setting an SL at a break-even zone once the price moves in our favor will be an excellent decision, especially in bear trap scenarios, where volatility will generally be high and consistent.

We should ensure a risk-reward ratio superior to 1:1, which will be straightforward if we use the SL as described before.

In Figure 1.5, you can see how a failed entry in interest zone 1 (which did not confirm correctly with a bullish candle pattern) would not mean a monetary loss if the SL had been moved to break-even; and in Figure 1.6, you will observe the correct trade management in a confirmed entry in interest zone 2.

Figure 1.5


Figure 1.6



Importance of the ABCD Pattern

The ABCD pattern reflects a part of investor psychology that, in the right context, can give us an extra point of statistical effectiveness. In double bottoms, I recommend taking entries at the first line of interest (around the 0.786 Fibonacci retracement) without neglecting the detection of the ABCD pattern and the always necessary volume and price confirmations.

At the second line of interest, considering that bear traps are extremely volatile, I believe we could overlook the detection of this type of pattern (ABCD), without discarding the notable volume entry and the candle pattern that confirms the entry.


Final Words

There are many contexts where an ABCD pattern will be our edge, but I have limited myself to addressing my personal application in double bottoms due to the complexity of the matter and the considerable time it would take me to exemplify each scenario.

If what is presented here proved useful, I will continue sharing in subsequent articles about different ways to establish effective entries using this pattern.


Bibliography

Bulkowski, T. N. (2005). The simple ABC correction. Technical Analysis of Stocks & Commodities, 23 (1), 52-55.
Carney, S. M. (2010). Harmonic trading, volume one: Profiting from the natural order of the financial markets. FT Press.
Elliott, R. N. (1946). Nature's law: The secret of the universe.
Morge, T. (2003). Trading with median lines: Mapping the markets. Market Geometry.

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Nota

Final Note
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