As I write this, I’m in the process of packing up for a week’s vacation in Italy. That packing, of course, includes my mobile trading station. I’m hoping to lose some of the weakness we’ve experienced in the market recently somewhere over the Atlantic.
In any case, it will be nice to have my mornings free since 9:30 am EDT is 3:30 pm in the Mediterranean. And don’t worry, you can still catch my daily updates live on the Warrior Trading Facebook and Youtube pages.
While I’m on vacation, I thought I’d spend this time reviewing a fairly common trading setup that every trader should be able to recognize as a strong bull flag. That’s the ABCD pattern, and it can be an invaluable tool when other momentum indicators fail.
An ABCD chart formation gets its name from the distinct line it traces, whose peaks and valleys constitute the A, B, C and D points. You can see an example of the pattern in this chart for Eltek Ltd. (NASDAQ: ELTK) from June 13 below.
The beautiful thing about the ABCD pattern is how easily recognizable it is. The first leg of the setup, the A, B line, is a period of selling that often comes following an intraday high. The B, C leg of the chart is shorter and represents a bounce from the selling pressure. Finally, the C, D line is the last and longest setup cue before the chart pivots back upward.
The key components of this setup are the top and bottom of each leg and the duration of each line. The points should match the staggered positions in the chart above and each line should also follow the medium, short, long pattern evident in ELTK.
The pivot after the D point obviously represents the best entry to capitalize on the move. However, even though this pattern is generally a reliable bull signal, there are no guarantees the chart will follow through with the same force as you see above, so setting a target price based on prior support and resistance levels and effectively scaling out of the trade remain essential to manage your risk.
Nevertheless, the ABCD pattern is a great tool to keep in your back pocket, especially in stocks that have other strong characteristics like a good size float or a history of running.
Warrior Trading is a content partner of Benzinga
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