Harmonic Patterns Cheat Sheet
Harmonic Patterns FAQ
What are harmonic patterns?Harmonic patterns stand as a prominent technical analysis method employed by traders and investors to forecast future financial market price changes. These patterns leverage Fibonacci ratios to construct geometric formations, predicting probable market reversal points. Harmonic patterns encompass the Gartley, Butterfly, Crab, Bat, Shark, and Cypher formations. Traders skillfully combine Fibonacci ratios and price action analyses to identify and trade these patterns. Harmonic pattern trading strategies often incorporate rigorous risk management and position sizing practices, complemented by a clearly defined trading plan outlining entry and exit strategies. While harmonic patterns offer valuable insights into market movements, they possess limitations and should be employed in conjunction with additional technical analysis tools for comprehensive market assessment.
The Imporant of those patternsIn the dynamic realm of trading and investing, harmonic patterns emerge as a beacon of clarity, guiding traders and investors towards potential market turning points. By discerning these geometric formations, traders can anticipate probable price fluctuations and adapt their strategies accordingly. This ability proves particularly valuable in turbulent market conditions where swift directional shifts can catch traders off guard. Harmonic patterns serve as a compass, steering traders clear of unfavorable market positions and presenting opportunities to enter or exit trades at advantageous prices. Embark on a journey of knowledge with this practical harmonic pattern Cheat Sheet and empower yourself to navigate the intricacies of the financial markets.
Who created this patterns concept?The 5-point “Gartley” harmonic pattern concept was first created by Harold M. Gartley in 1932 in his “Profits in the Stock Market” book. Then, Larry Pesavento improved the pattern by incorporating Fibonacci ratios and established trading rules in his book “Fibonacci Ratios with Pattern Recognition.” Pesavento and Bryce Gilmore also invented the butterfly pattern with Fibonacci ratios. After that, Scott Carney is known for his work on the Gartley, Butterfly, Crab, and Bat patterns, and his two-volume text “Harmonic Trading of the Financial Markets” is considered the best work on these patterns. Carney added specific requirements using Fibonacci ratios to validate the Gartley pattern’s structure and identified specific reversal levels using the term “Potential Reversal Zone” or PRZ. Carney even designed additional 5-point patterns like Crab and Bat designs.
Top 6 harmonic patterns
There are several five-point harmonic patterns that investors consider in trading. All of them have comparable setups. To illustrate, they merely differ regarding leg-length ratios and critical node positions (X, A, B, C, D). So, once you grasp one structure, the others will be pretty straightforward to understand.
The major cheat sheet of harmonics types includes a list of 6 patterns:
- Gartley structure
- Butterfly pattern
- Bat pattern
- Crab pattern
- Shark pattern
- Cypher pattern
Moreover, each of these structures has its own unique shape, Fibonacci ratios, and rules for identifying and trading the structure. While these patterns may be useful for analyzing financial markets, it is important to note that they should not be used in isolation. Yet, in conjunction with other technical analysis tools to confirm market trends and signals.
Let us describe each trading harmonic structure separately in both bullish and bearish markets.
- Bullish Gartley Pattern: It is a bullish reversal pattern that forms after a long downtrend. It consists of a series of price swings that create a bullish ABCD pattern. Then, it follows a retracement to the 0.618 key Fibonacci level. Finally, it moves higher to complete the pattern.
- Bearish Gartley Pattern: It is a bearish reversal pattern that forms after an elongated uptrend. It consists of a series of price swings that create a bearish ABCD pattern. Then, it follows a retracement to the 0.618 key Fibonacci grade. Finally, it moves lower to complete the pattern.
- Bullish Bat Pattern: This bullish reversal structure forms after a downtrend move. It builds by a series of price swings tracked by retracement levels of (0.382, 0.382, 1.618), (0.382, 0.886, 2.618), (0.5, 0.382, 1.618), or (0.5, 0.886, 2.618).
- Bearish Bat Pattern: This bearish structure pattern forms after an uptrend move. It builds by a series of price swings tracked by retracement ratios of (38.2%, 38.2%, 161.8%), (38.2%, 88.6%, 261.8%), (50%, 38.2%, 161.8%), or (50%, 88.6%, 261.8%).
- Bullish Butterfly Pattern: That bullish reversal structure shapes after a downward move and follows retracement levels of (0.786, 0.382, 1.618), or (0.786, 0.886, 2.618).
- Bearish Butterfly Pattern: That bearish reversal structure develops after an upside movement and follows retracement ratios of (78.6%, 38.2%, 161.8%), or (78.6%, 88.6%, 261.8%).
- Bullish Crab Pattern: A bullish reversal structure that develops after a downside movement and pursues retracement levels of (0.382, 0.382, 2.618), or (0.618, 0.886, 3.618) of the Fibonacci sequence.
- Bearish Crab Pattern: A bearish reversal structure that shapes after an upward move and pursues retracement ratios of (38.2%, 0.38.2%, 261.8%), or (61.8%, 88.6%, 361.8%) of the Fibonacci succession.
- Bullish Shark Pattern: it is a bullish reverse geometric structure that appears after a bear market. The final leg of the pattern is an extension of the BC leg, with a move that surpasses the X point.
- Bearish Shark Pattern: it is a bearish reverse geometric structure that appears after a bull market. Also, it is considered a relatively rare pattern and requires strict adherence to its rules to confirm its validity.
- Bullish Cypher Pattern: In a bullish Cypher structure, the price will eventually make a new high and then reverse to the downside. The Cypher pattern is considered a relatively reliable pattern.
- Bearish Cypher Pattern: In a bearish Cypher structure, the price will make a new low and then reverse to the upside. It can provide traders with good trading opportunities when used in combination with other technical analysis reversal tools.
What Fibonacci ratios are used in harmonic trading?
Harmonic trading patterns follow the Fibonacci sequence emanating from 61.8% and 161.8% ratios. To explain, Fibo retracements and extensions deliver traders with critical support and resistance levels. Below is a short description of retracements and extensions with projections also.
A retracement occurs when a price retraces a portion of a previous swing. This section might be expressed using Fibonacci ratios such as 0.38, 0.5, or 0.618.
Extensions occur when the price expands the previous swing by 100% and travels beyond the full swing. The extension swing can be 127% or 162% of the previous swings.
Projections occur when the price moves away from a completed retracement swing in the same (or greater) length as the original swing.
How to trade with them ?
Identifying harmonic patterns involves a mixture of price action analysis and Fibonacci percentages. Here are simple steps to identify such patterns:
- Step one: Pinpoint the potential harmonic pattern formation by looking for specific shapes on the chart. Once located, check if the pattern aligns with Fibonacci ratios and price action fundamentals.
- Step two: Measure the pattern to determine if it falls within the specified range for that pattern type. Each harmonic pattern has specific measurements for each of its portions.
- Step three: Check for confluence with other technical analysis tools, such as candle patterns, trendlines, or support and resistance grades to confirm the geometric structure’s success.
- Step four: Initiate a Buying or selling trade with the completion of the Harmonic Pattern and its confirmation by other analytic tools.
It is important to cite that identifying harmonic patterns correctly needs practice and experience. It is also advised to use multiple timeframes to increase the accuracy of pattern identification.
Now, we will learn how to integrate harmonic patterns into a forex trading technique with details.
Considering the bullish harmonic pattern example from the NZDJPY D1 forex chart. From March 24 to April 26, 2023, NZDJPY
formed a bullish harmonic formation. The pair made a first higher high from the D grade, suggesting the success of the harmonic design.
Traders may enter a long trade one tick above the bar high that confirms the pattern.
The harmonic structure fails if the price closes below the first point X of the pattern. Hence, you can place your stop loss a few ticks below the lowest price of the X.
The first location of targets is the C and A price levels. The next objective is at elongations of 127% to 162% of the AD range starting from the D point level.
Regarding this bearish harmonic pattern example from the USDCAD W1 FX graph. From October 09, 2022, to March 05, 2023, USDCAD
created a bearish harmonic design. This pair made a first Lower-Low from the D grade, suggesting a successful harmonic formation.
Investors can initiate a short trade one tick below the bar low that confirms the pattern.
The harmonic design fails if the price closes above the first point X of the pattern. Therefore, you can set your stop loss a few ticks above the highest price of the X.
The initial price levels to be targeted are C and A. The second goal is to extend the AD range by 127% to 162% starting at the D level.
Advantages and Limitations of Harmonic Patterns
Harmonic patterns have a higher chance of success. But the main challenge in trading them is correctly spotting them on the chart using correct ratios. Actually, the major difficulty resides in identifying and drawing them correctly on the trading chart. In fact, each pattern has a unique shape and is formed by different Fibonacci ratios. Which makes memorizing all of them by heart almost impossible.
Precision is essential for all Forex harmonic patterns and trading in general. Since we reduce mistakes when we are as accurate as possible. The harmonic pattern PDF trading technique provides us with the best rules and chances of success. Note that using harmonic patterns in technical analysis, like any other trading approach, involves experience, dedication, and patience. So, harmonic patterns may be a powerful weapon in a trader’s arsenal if he properly understands the cheat sheet and applies them correctly.