Now we learn about harmonic patterns trading strategy, this is a further discussion after we have studied several basic chart patterns.
Actually there are many kinds of chart patterns that can be formed by market dynamics and movements.
So in this writing about harmonic chart patterns trading strategy.
We will also divide them into several models of chart patterns.
With more and more we learn various kinds of chart patterns.
With the hope is to further improve skills in trading for the better, of course.
Because as a trader, we must also be flexible.
It’s meaning that we must learn not only one way of analyzing the market, but this is also to develop our mindset in exploiting the capabilities of a trader.
In the harmonic chart patterns trading strategy we will learn about some of the pattern names as below.
ABCD Pattern, Three-Drive Pattern, Gartley Pattern, Crab Pattern, Bat Pattern, Butterfly Pattern.
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The ABCD pattern is one of the basic Fibonacci patterns that give a reversal signal.
Simply put, if this pattern has formed perfectly, then the price will most likely be reversed in the opposite direction.
In addition, the ABCD pattern can be used in market conditions of an uptrend or downtrend.
More specifically, a bearish ABCD pattern indicates a downside reversal after prices move up within a certain period.
Conversely, a bullish ABCD pattern is an indication that prices will rise sharply after a downward trend over a certain period of time.
In ABCD pattern AB lines and CD traders refer to it as a leg, while the BC line is the correction or retracement line.
You can use the Fibonacci retracement to determine AB leg, with BC correction must reach the level of 0.618.
Meanwhile, the CD line must be an extension of 1,272 BC Fibonacci.
The important thing is to wait for the whole pattern to finish reaching point D before taking short or long positions.
It is important to know, make sure the ABCD patterns are formed completely following the basic rules so that the accuracy of ABCD pattern reversal signals can be relied upon.
- The BC line must be on a retracement of 0.38 to 0.78 from the AB leg, use the Fibonacci tool to measure retracement.
- CD legs are extensions of Fibonacci points 1.27 to 1.68 from the BC line.
- The length of the AB line is ideally the same length as the CD line.
- The period (length of time in reaching one point to another) AB leg is as long as the leg CD.
The three-drive pattern
The three-drive pattern is visibly similar to the ABCD pattern except the difference is that it has three legs or is called a drive and two corrections or retracements.
If you have known Elliot Wave before, this is his ancestor.
To find this pattern you will need the Fibonacci tool, and patience to find this pattern.
So that the accuracy of the Three Drives pattern has reliable accuracy, make sure that each part of the pattern meets the following rules.
- Retracement A is a correction of 38% to 78% of drive 1.
- Retracement B is a Fibonacci retracement of 0.38 to 0.78 of the drive 2.
- Drive 2 is an extension of 127% to 168% of correction A.
- Drive 3 is a Fibonacci extension of 1.27 to 1.68 of correction B.
- Drive period 2 is the same as drive 3.
- The time to complete retracements A and B is ideally the same.
I am also writing a special Three drive pattern here
Gartley chart pattern
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The Gartley chart pattern is one of the many patterns that was first discovered by a smart trader named Harold McKinley Gartley.
He discovered this pattern during his time as a stock market advisor in the mid-1930s.
According to him, the Fibonacci patterns that he discovered were able to solve two of the trader’s biggest problems, namely; on what assets and when to buy.
Soon, market participants began to realize that this pattern could also be applied not only in the stock market but also in other markets.
What is the Gartley Pattern?
The Gartley pattern or some call it the 222 patterns because the name was taken from a page found in Harold M. Gartley’s book, “Profit in the Stock Market”.
Basically, the Gartley pattern is the development of the ABCD archetype but begins with a significant high or low price.
Gartley patterns usually form when a correction is taking place from the movement of a price trend.
At a glance, the pattern will look like the letter ‘M’ (or ‘W’ for a bearish pattern).
This pattern can help traders to find out where the best price level is to enter the market (OP).
Take a look at the image below.
A Gartley is formed when the recent up or down price trend has begun to show signs of a correction.
In identifying is to take step by step.
In any case, the pattern is similar to the ABCD pattern up or down, but it is preceded by a point (X) that goes beyond point D.
In essence, the “perfect” Gartley pattern has the following characteristics:
- If the BC retracement is 0.382, then the CD must move 1,272 from BC.
- If BC is 0.886, then the CD must be expanded 1,618 from BC. The AB line is the retracement of 0.618 from XA.
- The BC line is a retracement of 0.382 or 0.886 of the AB line.
- The CD leg is a retracement of the 0.786 retracements of X.
Crab pattern trading
Crab pattern is actually the result of the development of the Gartley pattern and is one of the variations
Around 2000, Scott Carney strongly believed in the harmonic pattern (Fibonacci pattern), and then discovered the “Crab” pattern.
He stated if this pattern has the highest level of accuracy among all Fibonacci patterns because the length of the XA foot extension to the CD foot indicates a strong reversal potential.
This pattern has a high risk-to-reward ratio because you can place a very tight Stop Loss on the last leg.
The ideal Fibonacci Crab Pattern must meet the following aspects
- The length of the AB line is the retracement of 0.382 or 0.618 of the XA leg length.
- The length of the BC line can be a retracement of 0.382 or 0.886 of AB leg length.
- If the length of the BC line is a retracement of 0.382 from AB, then the CD must be 2.24 extension from BC.
- Meanwhile, if the length of BC is the 0.886 retracement of the length of AB, then the CD is the extension 3,618 of the length of BC.
- The leg of the CD is a 1,618 extension of XA length.
Bat pattern trading
Bat pattern is another variation of the Gartley pattern, this is also the result of developing the Gartley pattern.
In 2001, Scott Carney discovered another harmonic pattern (Fibonacci pattern) which he called the bat pattern.
The main cash characteristic of this pattern is the potential for a strong reversal after the last leg reaches a key retracement of 0.88 of its initial leg.
The rest, here are the general characteristics of the Fibonacci pattern:
- The length of the AB leg is a retracement of 0.382 to 0.5 of XA.
- The BC line can be 0.382 or 0.886 retracement of the AB line.
- If the BC line has a retracement of 0.382 from AB, then the CD line is 1.618 extension from BC.
- Meanwhile, if BC moves backward 0.886 from AB, then CD is extension 2,618 from BC.
- The ideal CD leg is the 0.886 retracement of the XA leg.
Butterfly pattern forex
Again, a variant of the Gartley pattern called the butterfly pattern.
The Butterfly Pattern is what discovered by Bryce Gilmore.
The main characteristic that distinguishes the Butterfly pattern is the 0.786 retracement of the AB line from the XA leg.
Like most of another pattern above this pattern will indicate potential reversal if it meets the following criteria:
- The length of the AB line is the retracement of 0.786 from the XA leg.
- The length of the BC line is the retracement of 38.2% to 88.6% of the AB leg.
- If the BC line retraces 0.382 from AB, then the CD is extension 1,618 from BC, and, if the BC line retraces to 0.886 from AB, then the leg of the CD must be expanded 2,618 from the BC line.
- The CD leg is an extension of 127% to 161.8% of the XA leg.
How to trade with harmonic patterns
To be able to gain the gain from the Harmonic Pattern, we must be able to place a position order in a “perfect” way.
But indeed, in reality, the Harmonic Pattern is not so easy, where you have to know and understand in advance about the basic steps of the Harmonic pattern.
The basic steps of the pattern through three stages are as follows:
- Step one, finding the potential of the Harmonic Pattern.
- Step two, measure the potential of the Harmonic Pattern.
- Step three, place a Buy or Sell position at the end of the harmonic pattern.
The first step is very important then the next step is followed.
If you can follow these three basic steps, then you can find a high probability that can help you in making a lot of profit.
We will try with the example in the image below:
Step one, finding the harmonic pattern
In accordance with step one, we find the harmonic patterns.
From the picture above, it looks like a harmonic pattern with the ABCD marker.
At first, we might not be sure of the type of pattern from the image above.
This might look like a triple drive, or it could just be a Bat or Crab.
Step two, measure the potential harmonic pattern
Although we are not sure what type of pattern appears, we then go to step two, measuring the harmonic potential by labeling it from the reversal points.
By using Fibonacci we measure the pattern formed.
- In this pattern, the length of BC is 0.618 retracement of AB.
- CD length 1,272 extension of BC.
- The length of AB is approximately the same as the length of the CD.
In this pattern, we conclude that the eligible pattern is the ABCD bullish pattern, which is a very strong buy signal.
Step three, place order of the end pattern
If after the pattern is complete, you then go to step three by placing a buy order position for the chart as shown in the picture below.
In this case, you must open a buy position at point D, which is an extension of the 1.227 Fibonacci level from CB, and place your stop loss a few pips below the price of your entry.
However, you don’t have to be exactly the same.
Because the problem with harmonic patterns is that they are so perfect that they are so hard to find.
More than knowing the steps above, you must have a sharp analysis to find out the potential of the harmonic patterns.
It requires endless patience to find the perfect pattern.
As with other strategies, the harmonic patterns trading strategy also has its own difficulties, especially to find the perfect pattern.
You should familiarize yourself to draw Fibonacci finding the type of pattern that appears, whether it’s ABCD Pattern, Three-Drive Pattern, Gartley Pattern, Crab Pattern, Bat Pattern, or Butterfly Pattern.
And most of all, your money management must be strict, learn the discipline to apply strategies, remember every tick of price moves will carry the risk.