The ABC(D) pattern is perhaps one of the first things many traders learn. When something is trending in a certain direction, eventually it will need to enter a correction phase. During this phase, it will often either make a dramatic temporary reversal; or enter a stage of "consolidation" and start forming a flag, penant, or any other of the commonly known consolidation patterns.
These ABC patterns are very tradable. Oftentimes you just need to buy a confirmation candle after a C leg has likely completed. Below, I go into some of the types of ABC patterns I often come across, and some tips on how to trade them.
Know your ABCs: 3 types
I have identified 3 main "types" of ABC patterns.
The weak C
In the first type, we will generally see a retreat from highs, a bounce, and then another fall, ending a little lower (but not too much lower) from the low of the previous leg down (the "A" leg.) This creates a powerfull bull divergence on indicators such as the MACD and RSI, implying strong support. When I see this kind of setup, I often think of it as high confidence. It can go wrong in 2 ways: (1) the bounce after the last leg down is just a bull trap, only to resume falling or (2) it starts to form a more complex consolidation pattern (e.g. a bullflag.) This isn't neccessarily a bad thing but it will make the trade slower.
AB=CD
This one is a favourite for harmonic traders. While I don't really believe in harmonic trading patterns, this one happens to be pretty powerful. The idea here is that the price difference between A->B, and from the top of B->C is somewhat the same. For harmonic traders, there is a much more rigid definition involving fib values, but I won't go into it here. The name of this pattern is talking in terms of 'price points' rather than 'legs', which is why it is ABCD rather than ABC as I like to describe it. These patterns can be high confidence because many traders will pick up on the AB=CD pattern and start to buy it.
For both weak C and AB=CD, you can generally expect the market to continue to new highs. So it's a good idea to buy these and hold them until new highs, or sell some of your position at a resistance point to lower your basis and save the rest for later.
Capitulation C
In this pattern, the C leg will fall much further than the A leg. I have also seen this called an "extended correction." When this happens, the greater structure of the market can often be challenged. While we will probably see some kind of bounce, it's hard to say whether the stock will resume its bull trend after such a steep drop. However, in a strong bull market, it often does. Oftentimes these legs are triggered by something like news or other external events, and generally you can make a judgement on what trade to take based on whether this external event is likely to effect the thing you're trading in the long term.
Personally on these capitulation legs I will just be looking for very short term trades on the powerful bounce that generally follows.
When do I buy a C leg?
This is the million dollar question: when can you be sure a C leg is indeed a tradeable C leg, and therefore ready to buy? The short answer is you can never be sure. The only thing you can do is make wise trades based on your best guess, with adequate risk management.
Generally, finding confirmation on when to buy starts with lowering your timeframe to get a deeper look at the market activity. If you are trading daily candles, try for hourly. If you are trading 15m candles, try for 3m or even 1m, et cetera. Personally when trading crypto I am often trading the 15 minute timeframe, and will look for ABC patterns there. Then, when I see a C leg forming, I will switch to 1 minute to find a good place to buy.
Confirmation candle
One of the best way is to wait for a candle that implies strong buying and reversal. This will generally be something like a reversal hammer, engulfing, et al, with plenty of volume. Simply buy after this candle, and put your stop-loss just below the candle. If selling continues, you can always try again. Or, if the position is low-risk and you are looking to hold for a while and possibly accumulate more, you don't even need to worry about the stop loss - you can set a much more liberal one, and just keep accumulating as it goes down.
Book trading
This one is my favourite. I like to stare at the order book as a C leg is forming. This one takes quite a bit of practice, and there's not really much of a standard practice in book trading. It's very much based on intuition, but if you practice for a while, you will start to create connections in your mind of what kind of order book activity constitutes a possible bottom.
Indiscriminate buying
Of course, the easiest option is to just accumulate as soon as it drops below the bottom of the A leg, and continuing until selling dries up. This is a very risky option and is associated with degenerates who end up losing their accounts on high leverage. However, especially on trades I have been excited about, I myself am guilty of this. Use with extreme caution, and make sure you always have an exit price in mind just incase things don't go your way.
Additional tips for trading ABCs
The higher the timeframe, the more confident the pattern
I think this goes for pretty much all chart patterns. Patterns showing up on higher timeframes are more likely to play out. For crypto, high-confidence timeframes can go as low as 4h or even 15m; but for stocks, you will want to be looking at much higher timeframes - daily, weekly or even monthly.
Don't panic if what you thought was a normal C leg becomes a capitulation one
This happens to me all the time. Even if I do everything right, and have all the confirmation I need, everything can still change in an instant. You could buy at the right place, have your stop loss set, only for the price to fall straight past your stop loss. Suddenly your position is caught in an extended drop. What to do? The first thing you shouldn't do is panic. If the position is large, it might be wise to just consider selling, and buy again when you see confirmation again. You might enter a drawdown but the only thing you can do is move on.
Don't underestimate this pattern
When trading crypto especially, I think this pattern consists of about 90% of my trading activity. Honestly, after being in the game for 4 years I think it's the most safest, profitable pattern I've been able to find.
Stocks are a bit of a different ball game. Many patterns are low-confidence, and you have to rely a lot more on luck. However, it's still a very powerful pattern even when trading stocks. Just make sure you use the correct risk management strategy, and you should be fine.
So there you have you, the ABC (or ABCD) pattern in a nutshell.