What are Harmonic Patterns?
Chart patterns called harmonic patterns can aid traders in identifying pricing trends by foretelling future changes in the market. To spot possible price shifts or trend reversals, they use Fibonacci numbers to generate geometric price patterns. These patterns can be recognized by traders, who can then use them to guide their upcoming trading choices.
There are numerous chart patterns available, and each one can be utilized to identify a certain trend. To always be able to make the finest and quickest trading decisions, it’s crucial to remember that before implementing any pattern, you should have faith in your capacity to conduct your technical analysis.
List of all harmonic patterns
The harmonic patterns cheat sheet that is used to forecast the market currently lists 7 harmonic patterns.
- The ABCD pattern
- The BAT pattern
- The Gartley pattern
- The butterfly pattern
- The crab pattern
- The deep crab pattern
- The shark pattern
The ABCD pattern
The ABCD (or AB=CD) pattern, which has three motions and four points, is arguably the simplest pattern of them all. A corrective movement (BC) follows the spontaneous movement (AB), which is followed by another impulsive movement (DC) that moves in the same direction as AB.
The BC leg should precisely reach 0.618 using the Fibonacci retracement tool on the AB leg. The price should go from point A to point B in the same amount of time that it moves from point C to point D, and the CD line will be the same length as the AB line.
Traders have two options: either they can place their entry orders close to the C point, which is known as a Potential Reversal Zone (PRZ), or they can hold off initiating a long or short position from the D point until the entire pattern is complete.
The BAT Pattern
The bat-shaped final product gives the BAT design its name. The BAT pattern, discovered by Scott Carney in 2001, consists of specific components that characterize PRZs.
It has one more leg than the ABCD pattern, as well as an additional point that we’ll call X. There will be a BC retracement movement after the first leg (XA). You are likely observing a BAT pattern if the retracement up to point B stops at 50% of the initial XA movement.
The CD extension can go as high as 2.618 and must be at least 1.618 of the BC keg. If the CD extension is less than the BC extension, the figure is incorrect. Trading positions can be formed to trade either a bullish price reversal or a bearish price inversion since the endpoint (D) causes the PRZ.
The Gartley Pattern
The Gartley pattern, developed by HM Gartley, contains two main guidelines:
- Point B’s retracement must be 0.618 of XA.
- Point D’s retracement of the XA movement must be 0.786.
In that the XA leg results in a BC retracement, it is similar to the BAT pattern; however, point B’s retracement must be precisely 0.618 of XA. Point X is frequently chosen as the stop-loss point, and point C is frequently chosen as the take-profit point.
The butterfly pattern
Bryce Gilmore identified the butterfly pattern while looking for probable retracements using various Fibonacci ratio combinations. It is a four-legged reversal pattern with the markings X-A, A-B, B-C, and C-D.
The 0.786 retracement of the XA leg is the ratio that has to be defined the most. Plotting point B in this way makes it easier for traders to locate the PRZ.
The crab pattern
Another invention by Scott Carney, the Crab is characterised by its X-A, A-B, B-C, and C-D patterns, which let traders join the market at extremely high or cheap prices. The 1.618 extension of the XA movement, which establishes the PRZ, is the key component of the crab pattern.
The first leg of the crab’s bullish variation arises when the price rapidly increases from point X to point A. The AB leg repeats XA by anywhere between 38.2% to 61.8%. A valid location for the pattern’s completion and the prospective reversion of the current trend is indicated by the extreme projection of BC (2.618, 3.14, and 3.618), which comes next.
A bearish crab will show a plunge from point X to point A, a slight price increase, a small decline, and a rapid price increase to point D.
The deep crab pattern
This is a significantly modified version of the Crab design that was previously described. The retracement of point B, which must equal 0.886 of the XA movement without going beyond point X, is the only difference.
The range of the BC projection is 2.24 to 3.618.
The shark pattern
The shark pattern was also discovered by Scott Carney, and it resembles crab patterns in certain ways. It is a five-legged reversal pattern with the points O, X, A, B, and X marked on it.
The following three Fibonacci rules must be met by a shark pattern:
- A retracement of the XA leg between 1.13 and 1.618 should be visible in the AB leg.
- 113% of the OX leg will be in the BC leg.
- The Fibonacci retracement of the BC leg’s 50% is the goal of the CD leg.
Point C serves as the basis for all shark-patterned deals, and point D serves as a predetermined profit target.
Why are Harmonic Patterns so Popular in Forex Trading?
Because they are so well suited to the real-time fluctuations of the foreign exchange markets, harmonic patterns are incredibly popular among forex traders. They can alert a trader, based on past data when underlying conditions are likely to lead to a price decline.
How do you Identify and Draw Harmonic Patterns?
Depending on the sort of market action, there are many ways to find and draw harmonic patterns (bearish vs bullish). Therefore, even if there are numerous harmonic patterns, they can be divided into two groups: bearish patterns and bullish patterns.
Bearish vs Bullish harmonic patterns: what is the difference?
While negative traders operate under the assumption that the market is headed downward, bullish traders have the belief that their market is likely to undergo an upward price movement. The same principle holds true for understanding bullish vs. bearish harmonic patterns.
Bullish traders could take a long position on their preferred market if a succession of harmonic patterns suggests that the market is in an upswing in order to profit from any upturn.
A trader may choose to start shorting their market if they see a negative harmonic pattern by trading stocks or commodities on the belief that the price will decline.
Start trading with harmonic patterns
Use these methods to begin trading with harmonic patterns:
- Spend some time studying the harmonic pattern theory.
- Make a decision regarding whether you will employ a bearish or a bullish strategy.
- Open a trading account with us and begin scanning your preferred market for harmonic patterns.