• 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