How to Trade the ABC Pattern

Video Transcription:

Hello, traders. Welcome to the Elliott Wave Theory course, and the second module, Elliott Wave Patterns. Today, we’re going to learn how to trade the zigzags or the A, B, C patterns that we are going to find at the end of very strong trends.

We’re going to jump right into the MT4 platform. As you can see here, I have the daily Euro/US dollar chart. As you can see, from this high to this low, we have been down around 3,500 pips. It’s easy to say, “Oh man, we should have been shorting from this breakout, or this breakout, etc,” but trading is actually not that easy, and it requires excellent timing. This is why we use the Elliott Wave Theory to perfectly time our entries, and that’s it. By perfectly timing our entries, we are going to have a great risk to reward ratio, and our overall performance will be even better.

Trading the ABC Pattern

I have zoomed out the chart so you can see actually that we were in a very steep down move from May of last year until now. We have been around…well, we were in this down move around a year, then we started to chop to the upside, but I mean, everybody assumes that we are going to be breaking lower. It looks like it will be, just by looking at the chart. I’m going to zoom in a little bit, just to get the ratios right.

The first thing you’re going to notice is that, we were right here in a very strong down move from these highs to these lows for about 900 pips. When we made this low, which will be our point X, we don’t know if this is the point X just yet, but we are going to name it X. The reason we don’t know if it’s the point X yet is that if we actually just correct to the upside and break lower, we are going to have to just erase this X and just wait for a new one. In this case, you can see that we broke with the down structure that we were in, and of course I can do this on the 4-hour or the 1-hour chart if I really zoom in the bars, but I wanted to do it on the 1-hour chart because it’s going to be easier on the eyes. I’m sorry. This is our point X.

Because we broke with the up structure, we are going to name this our point A. But remember that this is just an assumption. We need to know if the ratios of the second wave are going to be the exact ratios that we need in order for us to start confirming that this is in fact a zigzag that we are in. We are going to grab a Fibonacci retracement tool, and we are going to measure the retracement between the X point and the A point. As you can see, we hit right in the range of our retracement between the 61.8 and the 78.6, which is this zone right here. This is the exact zone that point B or the second wave needs to retrace to, in order for us to start thinking that we are in an A, B, C or in a zigzag. In this case, will be a bearish zigzag.

Because this is point B, and we just started to trend to the upside, now we need to figure out where our sell zone is going to be. The way we are going to figure out where our sell zone is going to be is by grabbing this tool, which is the Fibonacci extension tool. We are going to take it from this low, to the high of the first wave and then again to the low. This will give us the 161% extension. As you can see right here, this is going to be our sell zone. Remember, this is going to be our sell zone, the 161.8. But, you also need the 127.2 Fibonacci ratio, so let’s go to the extension properties and let’s add this Fibonacci extension, which is the 127.2.

Now, we just add it. So the actual sell zone is going to be this one, between the 127.2 and the 161.8. This is the sell zone. But remember that we are not going to put our orders right here, we are going to put our sell orders right around here. I’m going to use this red line to mark our short entry. Why are we going to place our pending order here, and not all the way up here? The reason is, we want to get filled. We want price to hit this zone. Of course, we have our point Z, all the way up here. We want price to hit this zone.

ABC Pattern trading

Now, what we are also going to do is, we are going to be helping us from the previous levels. You can see that we have a level of resistance and a level of support right here. This is a very important level, around the 161.8, which we will be finding a lot of sellers at. Let me just get rid of these levels because our charts look very cluttered. Right here we have our sell zone, and we are going to position our stop-loss above the previous high and that’s very logical. Because if we break with this high, it will mean that we are going to be making higher highs and breaking with this structure. Now we could be in a complete reversal trade and not only a corrective move to these highs.

So this is where our stop-loss is going to be. Right here. I’m going to change the color of this rectangle to again, an orange, so you can better see where our stop-loss is going to be positioned. Here is where our stop-loss is going to be positioned. We are going to put our pending orders right here. This will mean that we are going to be risking about 180 pips.

Where are going to be our first targets? Our first targets are going to be right here. Our targets are going to be right here. Around the high of 0.8, or around the high of the first wave. We don’t know what’s going to happen, guys, and this is why you always take profit. You don’t know if price is going to break with these highs, or if prices are actually going to bounce. In this case, you can see that it bounced up. Our targets are going to be…let me just grab this rectangle and show you where our targets are going to be. Here. Around here.

Basically, we are risking 180 pips to make 380 pips, and that is very good, better than 1:2 risk to reward ratio. An excellent trade if you ask me. This is basically how you’re going to be trading the zigzags. You are going to find a trending market. You are going to find your point X, which is the high, or in this case, the low, of the move, then you’re going to find the ratios, you’re going to put your orders in, your stop-losses, and your profit taking levels. This is how you make money using the A, B, C pattern of the Elliott Wave Theory.

Adam

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