Harmonic patterns are chart patterns that help traders spot pricing trends by predicting future market movements. They are used as part of a trading strategy. They develop geometric pricing patterns by identifying possible price shifts or trend reversals. Traders can recognize these trends and use them to help them make their next trading decision. There are numerous chart patterns to pick from, each of which can be used to identify a specific type of trend. However, before you follow any pattern, you should always be confident in your ability to perform your own technical analysis to make the best – and fastest – forex trading decisions.
Harmonic trading uses patterns and math to create a precise trading system based on the concept that patterns repeat themselves. The primary ratio, or any derivative, is at the heart of the technique. The primary ratio can be found in nearly all natural and environmental structures and occurrences, as well as manufactured structures. Because the pattern repeats across nature and culture, the ratio can be found in financial markets, which are influenced by the surroundings and societies in which they operate. The trader can use Fibonacci ratios to predict future moves after identifying patterns of varied lengths and magnitudes. Let’s explore more about the patterns themselves.
Butterfly
The Butterfly pattern is a reversal pattern that appears toward the end of a trend move. It was created by Bryce Gilmore, and consists of five points: X, A, B, C, and D. The pattern can take two forms: bullish butterflies, which signal when traders should buy, and bearish butterflies, which show when traders should sell. Butterfly patterns assist traders in predicting the end of a current trend so they can enter the trade.
ABCD
By far, the most straightforward harmonic pattern to sketch and understand is the ABCD pattern. This pattern has only four touchpoints and is formed by three distinct swings from the currencies’ initial price movement. The first move is from A to B, then a retracement from B to C. This is followed by yet another rash move from C to D. The line segment from A to B is essentially the same as the line segment from C to D due to the Fibonacci levels. When the currency reaches D, you can enter a long or short position in the currency.
Gartley
The Gartley was one of the first harmonic patterns discovered in the 1930s by H. M. Gartley. The Gartley pattern typically follows a strong low or high, suggesting that the overall trend is changing. Bullish Gartley patterns resemble an M, while bearish patterns resemble a W. We have five points in each: X, A, B, C, and D. When we reach point D, it’s a fantastic time to make a transaction. Point D is a time to buy or enter a long position in a bullish Gartley and a time to sell or take a short position in a bearish Gartley.
Crab
The Crab harmonic pattern, discovered by Scott Carney and providing an objective basis for a trading method, produces a similar appearance to the Butterfly harmonic pattern but with slightly different ratios. The configuration is also a reverse pattern. However, the extension leg has a 1.618% swing point. When a trader recognizes the Crab harmonic pattern, it is often a dependable way of signaling the conclusion of a price trend and the beginning of a new one, whether bullish or bearish, over a short or long period. As with other harmonic patterns, a trade will often be placed at point D, with a stop loss at point X.
Shark
The Shark pattern is a more recent harmonic trading pattern, first appearing in 2011. A five-leg reversal sequence is used in the design. The chart resembles a dorsal fin due to the sharp outside lines and modest dip in the middle, hence the name.
Cypher
The Cypher pattern is a 4-leg pattern discovered and characterized by Darren Oglesbee. It is less prevalent than other patterns, yet it is widely employed in harmonic trading and analysis. Because of its rarity, traders should allow for alterations to the Fib levels used in pattern charting.
Bottom line
Unlike typical chart trading patterns such as head and shoulders, triangles, and wedges, a harmonic pattern must meet precise movement requirements to be recognized as genuine and thus marketable. This eliminates the subjectivity of trading classic chart patterns, and makes it more objective. As a result, all financial markets, including stocks, commodities, and the FX market, can benefit from harmonic patterns. In addition, each pattern outlined above is associated with a trading strategy, including entry points, stop-losses, and profit targets.
