Harmonic patterns forex is one of the methods in technical analysis that aims to predict the possibility of future price movements.
The harmonic pattern uses the basic analysis that the movement of a trend often forms a harmonic pattern. This means the trend can be divided into small or large waves which can help predict future prices.
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What are harmonic patterns?
Harmonic Patterns are patterns formed by market mechanisms. This pattern is geometric that how to draw it using Fibonacci numbers as a benchmark.
Through an analytical approach with Harmonic Patterns, it is then used to predict price movements and determine reversal points for entry points and exit points.
Harmonic patterns forex is widely used by forex and CFD traders because they can apply on various time frames and are considered more accurate than the use of general technical indicators.
How harmonic patterns works
Harmonic Pattern forex implements a trading system based on the belief that price patterns that have been formed in price history will always repeat themselves.
The initial market analysis using this harmonic pattern is to use the Fibonacci Golden Ratio series (0.618 or 1.618) and its derivatives (0.382, 0.50, 1.41, 2.0, 2.24, 2.618, 3.14, and 3.618).
The Golden Ratio discovered by Leonardo Fibonacci is commonly found in natural phenomena, architectural buildings, and art.
Then the Golden Ratio is brought for analysis on financial markets which are also influenced by nature and the environment that shapes it.
How many harmonic patterns are there?
Studying this harmonic pattern may be a bit more complicated because it requires its own foresight in using the Fibonacci levels to find the harmonic pattern.
It is known that there are seven harmonic patterns that are known among traders.
- ABCD pattern.
- Bat pattern.
- Gartley pattern.
- Butterfly pattern.
- Crab pattern.
- Deep Crab pattern.
- Shark pattern.
ABCD pattern
The ABCD pattern is a pattern made up of three moves and four dots.
- The first movement at point AB is called an impulsive movement.
- The second is the BC movement which is called corrective movement.
- And the third is the DC movement which is called the second impulsive movement which is in the direction of AB.
How the ABCD pattern is formed using Fibonacci retracement on leg AB, leg BC at a ratio of 0.618. Line CD is the same length as line AB. Another rule is that the time the price moves from A to B must be the same as the time it takes to move from C to D.
When this pattern is formed, traders look for an entry point at point C, which is a Potential Reversal area. However, traders can wait for the perfect pattern at point D to go long or short depending on the pattern formed.
Bat pattern
This BAT pattern is a pattern that forms like a bat. Hence the name is the Bat pattern, introduced by Scott Carney in 2001.
This pattern is more complicated than ABCD which is the easiest pattern. It has one additional point which is the X leg.
The first leg (XA) forms a long line and will be the BC retracement point. The CD ratio is at least 1.618 of BC and can reach as high as 2.618. CD extension cannot be less than BC.
Point D becomes a potential reversal zone where traders can use this point D to open new entries.
Gartley pattern
Important to pay attention to the Gartley pattern is:
- The length of AB is equal to CD.
- The duration of the price movement from point A to B is the same as from point C to D.
How to read Gartley pattern
On the Bullish Gartley, the price moved up to point A and was corrected. B is the 0.618 Fibonacci Retracement of wave A. The price then went up through BC and it was a 0.382 to 0.886 Fibonacci Retracement line AB.
Next is the price moves down to CD and is 1.13 and 1.618 Fibonacci Extension of AB. Point D is 0.786 traceback from XA. This point D is when you can make an entry point.
Butterfly pattern
The pattern model of this pattern resembles a butterfly, so the inventor Bryce Gilmore named the butterfly pattern. It consists of four legs XA, AB, BC, and CD.
On the bearish Butterly Pattern, the price of X drops to point A. While the AB leg is the 0.786 Fibonacci Retracement of XA. BC is 0.382 to 0.886 Fibonacci Retracement of AB.
CD is 1.618 to 2.24 Fibonacci Extension of AB. D is at 1.27 Fibonacci Extension of the XA line. Point D is the point at which the trader opens a short position. But for low risk, you should wait for the price to be confirmed down.
Crab pattern
The inventor Scott Carney named this pattern the crab pattern because of its crab-like shape. This is a fairly complex pattern and requires deep understanding.
This pattern also has four legs. XA, AB, BC, and CD. But the most important thing is that XA is a ratio of 1.618 to determine the potential entry area at point D.
On the Bullish Crab pattern. Point B makes up a ratio of 0.382 to 0.618 of XA. While AB is a ratio of 0.382 to 0.886 of BC.
CD is a ratio of 2.618 to 3.618 of AB. Point D is a ratio of 1.618 of XA. Which point D is a potential area for open Buy.
Deep Crab pattern
The Deep Crab pattern is a derivative of the Crab pattern with a few differences. The important difference is that point B must have a ratio of 0.886 from XA, but point B must not exceed point X.
While the BC leg can have a ratio between 2.24 to 3,618.
In a bearish pattern, the price moves from X to point A, then the price goes to point B which does not exceed the value of X. Point D remains a potential area for open Sell.
Shark pattern
The shark pattern has five legs, labeled O, X, A, B, C. In this pattern, leg AB forms a ratio of 1.13 and 1.618 of XA. The BC leg makes up the 113% ratio of the OX.
As for the target using a ratio of 50% of the BC leg, the trader can use the D label to determine the target. And point C is a potential reversal area for entry points.
How to use harmonic patterns
How to use harmonic patterns consisting of several patterns requires an understanding of how to use Fibonacci retracements. Basically studying harmonic patterns is to get a potential reversal in a price in a trend.
Using Fibonacci is also not easy, but by learning the practice of drawing on charts. In the end, something that seems difficult will become easy after learning it.
To draw a harmonic pattern, it is very important to know the rules of each pattern. Because this also has a weakness, where the possibility of a pattern similar to the harmonic pattern occurs, however, the Fibonacci levels do not match.
How to draw harmonic patterns
How to draw a harmonic pattern, the first step is to identify the trend. After that, use the Fibonacci retracement in the last significant swing.
The example image above shows that point A is a swing low, while point B is a swing high which is the basis for dragging the Fibonacci retracement.
Next, we identify by looking at the correction that occurred to the 61.8% retracement area. If there is a correction, then you can then set point C.
Thus you have the first leg of the ABCD pattern, namely the movement of A to B. You also have a retracement which is a BC leg.
Next is to identify the potential location of point D. How to determine point D, is to draw the Fibonacci retracement from point B to C. The location of point D is in an extension of 127.2% (1.272) from BC.
Harmonic pattern finder
A harmonic pattern finder is software that can help traders find harmonic patterns. The level of complexity of drawing harmonic patterns has led traders to use alternative harmonic pattern finders.
Using harmonic pattern finder software allows traders to find harmonic patterns of various types. In contrast to indicators that only recognize one pattern, the harmonic pattern finder can recognize all types of patterns.
How to get this software?. Some sites offer this software for free, but you must register via the affiliate link at the specified broker.
So it’s not completely free, but you can try to find on the MQL5 codebase free download Harmonic pattern finder v3.
But since it’s a raw file, you should be able to convert it using the Meta Editor.
How effective is harmonic pattern forex?
Utilizing harmonic pattern forex trading analysis allows traders to find potential reversals which are important points for opening entries.
Some traders in implementing trading using this harmonic pattern are still accompanied by other tools to help decide an order to be made.
The harmonic patterns that are formed can vary, but it is important to understand the rules for the types of patterns that arise. Error bias due to improper ratio measurement can also be the reason for the failure of this strategy.
There is no holy grail in forex, using price action harmonic patterns must also apply good risk management.
If you find success stories using harmonic patterns, it may inspire you, but the success of others is not a measure of your own success. So by studying and practicing on your own, you will become who you really are.
Conclusion
This harmonic pattern trading strategy may be considered quite complicated for beginners and some other traders.
How to draw and find harmonic patterns is quite complicated and difficult. However, with the existence of several harmonic pattern indicators, the complexity disappears because the indicator will automatically draw a harmonic pattern if it finds a pattern on the chart.
Note: This article is for personal information and opinion only and does not constitute investment advice. Forex, Crypto, CFD trading is risky, each investor is responsible for his investment.
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