- Harmonic Patterns
- Pattern Identification
- 5-point Patterns
- Advantages & Disadvantages
Harmonic Patterns
- Harmonic patterns foundation was laid by H.M. Gartley in 1932 and later by Scott Carney in his books of “Harmonic Trading”
- Harmonic patterns reflect geometric price structures which adhere to Fibonacci ratio relationships
- These harmonic structures exhibits unique price movements and key turning or trend reversal points
- This factor is very helpful in trading as it provides highly trustful price entries and key levels for targets or stops
- Harmonic trading attempts to predict future movements, and this is what differentiates it from other indicators or oscillators
Pattern Identification
- Harmonic patterns are complex, but once a trader understands the pattern structure they can be spotted easily
- These patterns are either forming or completed “M” or “W” shaped structures or combinations of “M” and “W”
- All primary harmonic patterns are 5-point patterns with points (X, A, B, C, D)
- Price swings between these points are interrelated and have harmonic ratios based on Fibonacci
- Fibonacci ratios help traders in defining precise turning points in these patterns
5-point Pattern Example
- All 5-point harmonic patterns have similar principles and structures, and they differ only by their ratios
- Harmonic patterns (5-point) have a critical origin (X) followed by an impulse wave (XA)
- Followed by a corrective wave to form the “EYE” of the pattern at (B) completing (AB) leg
- Then followed by a trend wave (BC)
- Finally completed by a corrective leg (CD) that ends around the Potential Reversal Zone
- A possible pattern formation is identified after the first 3 legs (XA, AB, BC) are completed
- A potential trade setup is recognized as the last leg (CD) starts to develop
- Fibonacci extensions, retracements and projections are used to determine the Potential Reversal Zone
- All harmonic patterns have a clearly predefined Potential Reversal Zones (PRZ)
- The initiation of new trades should take place in this zone and only after price reversal action
5-Point Harmonic Patterns
Patterns looks similar and only differ based on the location of their key nodes
Among the most common 5-point harmonic patterns are:
- Gartley
- Bat
- Butterfly
- Crab
- Cypher
- Shark
Bullish Gartley Pattern
- B = 61.8% retracement of XA
- C = 38.2% to 88.6% retracement of AB
- D = 113% to 161.8% projection of BC
- D = 78.6% retracement of XA
- Long positions after clear bullish reversal
- Stop loss below the PRZ
- Target 1 = 38.2% retracement of AD
- Target 2 = 61.8% retracement of AD
Bearish Gartley Pattern
- B = 61.8% retracement of XA
- C = 38.2% to 88.6% retracement of AB
- D = 113% to 161.8% projection of BC
- D = 78.6% retracement of XA
- Short positions after clear bearish reversal
- Stop loss above the PRZ
- Target 1 = 38.2% retracement of AD
- Target 2 = 61.8% retracement of AD
Bullish Bat Pattern
- B = 38.2% or 50% retracement of XA
- C = 38.2% to 88.6% retracement of AB
- D = 161.8% to 261.8% projection of BC
- D = 88.6% retracement of XA
- Long positions after clear bullish reversal
- Stop loss below the PRZ
- Target 1 = 38.2% retracement of AD
- Target 2 = 61.8% retracement of AD
Bearish Bat Pattern
- B = 38.2% or 50% retracement of XA
- C = 38.2% to 88.6% retracement of AB
- D = 161.8% to 261.8% projection of BC
- D = 88.6% retracement of XA
- Short positions after clear bearish reversal
- Stop loss above the PRZ
- Target 1 = 38.2% retracement of AD
- Target 2 = 61.8% retracement of AD
Bullish Butterfly Pattern
- B = 78.6% retracement of XA
- C = 38.2% to 88.6% retracement of AB
- D = 161.8% to 261.8% projection of BC
- D = 127% to 161.8% projection of XA
- Long positions after clear bullish reversal
- Stop loss below the PRZ
- Target 1 = 61.8% retracement of CD
- Target 2 = 127% projection of CD
Bearish Butterfly Pattern
- B = 78.6% retracement of XA
- C = 38.2% to 88.6% retracement of AB
- D = 161.8% to 261.8% projection of BC
- D = 127% to 161.8% projection of XA
- Short positions after clear bearish reversal
- Stop loss above the PRZ
- Target 1 = 61.8% retracement of CD
- Target 2 = 127% projection of CD
Bullish Crab Pattern
- B = 38.2% to 61.8% retracement of XA
- C = 38.2% to 88.6% retracement of AB
- D = 261.8% to 361.8% projection of BC
- D = 161.8% projection of XA
- Long positions after clear bullish reversal
- Stop loss below the PRZ
- Target 1 = 61.8% retracement of CD
- Target 2 = 127% projection of CD
Bearish Crab Pattern
- B = 38.2% to 61.8% retracement of XA
- C = 38.2% to 88.6% retracement of AB
- D = 261.8% to 361.8% projection of BC
- D = 161.8% projection of XA
- Short positions after clear bearish reversal
- Stop loss above the PRZ
- Target 1 = 61.8% retracement of CD
- Target 2 = 127% projection of CD
Bullish Cypher Pattern
- B = 38.2% to 61.8% retracement of XA
- C = 127% to 141% projection of XA
- D = 127% to 200% projection of BC
- D = 78.6% retracement of XC
- Long positions after clear bullish reversal
- Stop loss below the PRZ
- Target 1 = 38.2% retracement of CD
- Target 2 = 61.8% retracement of CD
Bearish Cypher Pattern
- B = 38.2% to 61.8% retracement of XA
- C = 127% to 141% projection of XA
- D = 127% to 200% projection of BC
- D = 78.6% retracement of XC
- Short positions after clear bearish reversal
- Stop loss above the PRZ
- Target 1 = 38.2% retracement of CD
- Target 2 = 61.8% retracement of CD
Bullish Shark Pattern
- B = 38.2% to 61.8% retracement of XA
- C = 113% to 161.8% projection of AB
- D = 161.8% to 224% projection of BC
- D = 88.6% to 113% retracement / projection of XC
- Long positions after clear bullish reversal
- Stop loss below the PRZ
- Target 1 = 38.2% retracement of CD
- Target 2 = 61.8% retracement of CD
Bearish Shark Pattern
- B = 38.2% to 61.8% retracement of XA
- C = 113% to 161.8% projection of AB
- D = 161.8% to 224% projection of BC
- D = 88.6% to 113% retracement / projection of XC
- Short positions after clear bearish reversal
- Stop loss above the PRZ
- Target 1 = 38.2% retracement of CD
- Target 2 = 61.8% retracement of CD
Advantages
- Harmonic patterns provide future price projections and stop levels in advance and are considered leading indicators
- Harmonic patterns are frequent, repeatable, reliable and do produce high probable setups
- Their trading rules are relatively standardized using Fibonacci ratios
- Works on all timeframes and on all market instruments
- Other momentum indicator theories (CCI, RSI, MACD, DeMark…) can be used along with them
Disadvantages
- Harmonic patterns are complex and highly technical to understand and master them
- Correct identification and automation (coding) of harmonic patterns is difficult
- Conflicting Fibonacci retracements and projections make it difficult to identify the reversal or projection zones
- Complexity arises when we get opposing patterns from different timeframes
- The risk/reward factors from some of the patterns are pretty low
