Harmonic price patterns take geometric price patterns to the next level by using Fibonacci retracement to define precise turning points. Unlike other common trading methods, Harmonic trading attempts to predict future movements. Let's look at some examples of how harmonic price patterns, including Gartley, Butterfly, Bat, Crab, and Shark are used in trading.
Harmonic patterns construct geometric pattern structures (retracement and projection swings/legs) using Fibonacci sequences. These harmonic structures identified as specified (harmonic) patterns provide unique opportunities for traders, such as potential price movements and key turning or trend reversal points. This factor adds an edge for traders as harmonic patterns attempt to provide highly trustworthy information on price entries, stops and targets information. This may be a key differentiation with other indicators/oscillators and how they work.
The graphic below illustrates how Fibonacci ratios are used to apply retracement, extension, projection, and expansion swings.
There is quite an assortment of harmonic patterns, although there are four that seem most popular. These are:
The bullish pattern is often seen early in a trend, and it is a sign the corrective waves are ending and an upward move will ensue following point D.
This is how to read the Gartley pattern chart. We will use the bullish example. The price moves up to A, it then corrects and B is a 0.618 retracement of wave A. The price moves up via BC, and is a 0.382 to 0.886 retracement of AB. The next move is down via CD, and it is an extension of 1.13 to 1.618 of AB. Point D is a 0.786 retracement of XA. Many traders look for CD to extend 1.27 to 1.618 of AB.
The area at D is known as the potential reversal zone. This is where long positions could be entered, although waiting for some confirmation of the price starting to rise is encouraged. A stop-loss is placed not far below entry, although additional stop-loss tactics are discussed in detail in our Trading MasterClass.
For the bearish pattern, look to short trade near D, with a stop loss not far above.
The Butterfly pattern is different than the Gartley in that the butterfly has point D extending beyond point X.
Here we will look at the bearish example to break down the numbers. The price is dropping to A. The up wave of AB is a 0.786 retracement of XA. BC is a 0.382 to 0.886 retracement of AB. CD is a 1.618 to 2.24 extension of AB. D is at a 1.27 extension of the XA wave. D is an area to consider a short trade, although waiting for some confirmation of the price starting to move lower is encouraged. Place a stop loss not far above.
With all these patterns, some traders look for any ratio between the numbers mentioned, while others look for one or the other. For example, above it was mentioned that CD is a 1.618 to 2.24 extension of AB. Some traders will only look for 1.618 or 2.24, and disregard numbers in between unless they are very close to these specific numbers.
The Bat pattern is similar to Gartley in appearance, but not in measurement.
Let's look at the bullish example. There is a rise via XA. B retraces 0.382 to 0.5 of XA. BC retraces 0.382 to 0.886 of AB. CD is a 1.618 to 2.618 extension of AB. D is at a 0.886 retracement of XA. D is the area to look for a long, although wait for the price to start rising before doing so. A stop-loss can be placed not far below.
For the bearish pattern, look to short near D, with a stop loss not far above.
The Crab pattern is considered one of the most precise of the patterns, providing reversals in extremely close proximity to what the Fibonacci numbers indicate.
This pattern is similar to the butterfly, yet different in measurement.
In a bullish pattern, point B will pullback 0.382 to 0.618 of XA. BC will retrace 0.382 to 0.886 of AB. CD extends 2.618 to 3.618 of AB. Point D is a 1.618 extension of XA. Take longs near D, with a stop loss not far below.
For the bearish Crab pattern, enter a short near D, with a stop loss not far above.
Source: Forex Trading MasterClass
The Shark Pattern is a new harmonic pattern. It possesses a unique formation called an Extreme Harmonic Impulse Wave that retests defined support/resistance while converging in the area of the 0.886 retracement – 1.13 extension.
In all cases, the completion point must include the powerful 88.6% support/retracement as a minimum requirement. In addition, the unique extreme Harmonic Impulse Wave employs a minimum 1.618 extension. This combined with the 88.6% retracement defines a unique structure that possesses two profound harmonic measures to define the minimum level. In many cases, the price action will retest the initial starting point of the pattern and define excellent opportunities to take advantage of a forex market that has moved too far too fast within a limited period of time.
The Gartley pattern shown below is a 5-point bullish pattern. These patterns resemble “M” or “W” patterns and are defined by 5 key pivot points. Gartley patterns are built by 2 retracement legs and 2 impulse swing legs, forming a 5-point pattern. All of these swings are interrelated and associated with Fibonacci ratios. The center (eye) of the pattern is “B,” which defines the pattern, while “D” is the action or trigger point where trades are taken. The pattern shows trade entry, stop and target levels from the “D” level.
The following chart shows another 5-point harmonic pattern (Butterfly Bearish). This pattern is similar to the above 5-point Gartley pattern but in reverse. Here the pattern is “W”-shaped with “B” being the center (eye) of the pattern. The pattern shows trade entry, stop and target levels from “D” levels using the “XA” leg.
Harmonic patterns can be a bit hard to spot with the naked eye in forex trading and stock trading, but, once a trader understands the pattern structure, they can be relatively easily spotted by Fibonacci tools. The primary harmonic patterns are 5-point (Gartley, Butterfly, Crab, Bat, Shark) patterns. These patterns have embedded 3-point (ABC) or 4-point (ABCD) patterns. All the price swings between these points are interrelated and have harmonic ratios based on Fibonacci. Patterns are either forming or have completed “M”- or “W”-shaped structures or combinations of “M” and “W,” in the case of 3-drives. Harmonic patterns (5-point) have a critical origin (X) followed by an impulse wave (XA) followed by a corrective wave to form the “EYE” at (B) completing AB leg. Then followed by a trend wave (BC) and finally completed by a corrective leg (CD). The critical harmonic ratios between these legs determine whether a pattern is a retracement-based or extension-based pattern, as well as its name (Gartley, Butterfly, Crab, Bat, Shark). One of the significant points to remember is that all 5-point and 4-point harmonic patterns have embedded ABC (3-Point) patterns.
All 5-point harmonic patterns (Gartley, Butterfly, Crab, Bat, Shark) have similar principles and structures. Though they differ in terms of their leg-length ratios and locations of key nodes (X, A, B, C, D), once you understand one pattern, it will be relatively easy to understand the others. It may help for traders to use an automated pattern recognition software to identify these patterns, rather than using the naked eye to find or force the patterns.
Understanding how to identify a Harmonic Pattern is important, but if you want some help, the MT5 platform offers a useful Fibonacci toolkit and our trainers can provide you the right guidance. Open a forex account and notice how Gartley, Butterfly, or Crab pattern can make you serious money.
Guide to Precision Harmonic Pattern Trading - https://www.scribd.com/book/394041109/Guide-to-Precision-Harmonic-Pattern-Trading
Harmonic Patterns in the Currency Markets - https://www.investopedia.com/articles/forex/11/harmonic-patterns-in-the-currency-markets
Harmonic Trading, Volume One: Profiting from the Natural Order of the Financial Markets: Profiting from the Natural Order of the Financial Markets - https://www.amazon.com/Harmonic-Trading-One-Profiting-Financial/dp/0137051506
Scott Carney - https://cmtassociation.org/presenter/scott-carney/