Let’s begin with the most basic harmonic pattern. So, what could be more fundamental than the ABCs? We’ll just add another letter at the end, and the ABCD chart pattern is complete! That was simple!
All you need are razor-sharp hawk eyes and the helpful Fibonacci chart tool to see this chart pattern.
The lines AB and CD are known as the legs in both the bullish and bearish variants of the ABCD chart pattern, while BC is known as the corrective or retracement.
When using the Fibonacci retracement tool on leg AB, the retracement BC should reach 0.618. The line CD should thus be the 1.272 Fibonacci extension of the line BC.
Isn’t it simple? All you have to do is wait for the pattern to finish (reach point D) before taking any short or long positions.
But, if you want to be extra stringent, here are two more conditions for a good ABCD pattern:
- The length of line AB should be equal to the length of line CD.
- The time it takes for the price to go from A to B should be equal to the time it takes for the price to move from C to D.
Three Drive
The three-drive pattern is similar to the ABCD pattern, however it includes three legs (now called drives) and two corrections or retracements.
It’s as simple as pie! This three-drive pattern is, in reality, the ancestor of the Elliott Wave pattern.
You’ll need your hawk eyes, the Fibonacci tool, and a little patience for this one.
As the charts above show, point A should be the 61.8% retracement of drive 1. Point B, similarly, should be the 0.618 retracement of drive 2.
Then, drive 2 is the 1.272 extension of correction A, and drive 3 is the 1.272 extension of correction B.
When the entire three-drive pattern is complete, you can pull the trigger on your long or short transaction.
When the price reaches point B, you can typically place your short or long orders at the 1.272 extensions to ensure that you do not miss out!
But first, check to see if the following rules apply:
- The pricing should take the same amount of time to complete drive 2 as it does to complete drive 3.
- In addition, the time required to perform retracements A and B should be equal.
Next Lesson: Trading The Gartley Pattern