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Today, Forex trading is becoming more popular and even among persons who are not among the financial elite. With this rise in the popularity of Forex trading, Harmonic pattern trading has become one of the most rewarding trading techniques.
If you are not a financial elite, this trading technique might be quite tricky to wrap your head around. In this article, I am going to help you understand all the aspect of this trading technique. This will help you increase your success rates in Forex trading and take you to the next level as a trader.
Harmonic trading patterns take advantage of geometric price patterns and progress it to the other level by utilizing numbers of Fibonacci to identify exact turning points. In contrast to the conventional trading methods, the Harmonic trading patterns try to predict the future movements. This unique approach is what has made this technique very successful in Forex trading.
Taking advantage of geometry and Fibonacci numbers in Harmonic pattern trading
This trading technique combines math and patterns to make a trading method that is precise and relies on the premise that patterns usually repeat themselves. The primary ratio and its derivatives (0.618 or 1.618) make the foundation of this methodology. There are other complimenting ratios to this foundation including 0.382, 0.50, 1.41, 2.0, 2.24, 2.618, 3.14, and 3.618.
You can find these primary ratio – which is the foundation of Harmonic pattern – in almost all environmental and natural events and structures. As the patterns repeat within the society and throughout nature, the ratio also exists in the financial markets. The financial markets are influenced by societies and environments which they trade, both of which have patterns and can be predicted.
You are bound to find patterns of varying magnitudes and lengths and to predict the future movements as a trader; you have to apply the Fibonacci ratios as a trader. The Harmonic trading method is widely attributed to Scott M. Carney and has been bettered by others who have not only contributed to its perfection but also found patterns and levels that improves the performance.
Measuring the geometry and the Fibonacci ratio to define each Harmonic pattern is not easy and time consuming. Thanks to Harmonic scanner which is a big help for Harmonic traders, since the software can detect almost all patterns. So you don’t just cut the time to detect a pattern, more over you don’t miss any potential opportunity.
Issues related with Harmonic pattern trading
In this trading methodology, the price patterns are precise and require the pattern to indicate movements of an absolute magnitude so that the unfolding of the pattern can have an exact reversal point.
In some instances, as a trader, you could come across a pattern that is similar to the Harmonic pattern, but after close inspection, you realize the Fibonacci levels do not align with the pattern. This will mean that from a Harmonic approach, the pattern is unreliable. You can turn this scenario to an advantage if you are willing to exercise patience and wait for the ideal set-ups.
The Harmonic trading patterns can also forecast the duration of the current moves. With this information, you can be able to isolate reversal points. If you happen to take a position in the reversal area in this scenario and pattern fails, it can be dangerous.
When the pattern fails, you could be easily tied in a trade whereby the trend aggressively extends against you. To be successful with this trading technique, you must be very careful with the risks and have strategies to control them.
Types of Harmonic pattern trading
Several Harmonic patterns do exist, but four of them are the most popular. They are:
The Gartley Pattern
The Gartley pattern was brought to life in a book, Profits in the Stock Market published by H.M Gartley. Then years later, Scott M. Carney add the Fibonacci levels to the pattern, in his book, “Harmonic Trader”.
Over the years, other elite traders have added more common ratios to this pattern. This pattern comes to life when the price has been going in a downward or upward trend and has just begun to show signs of correction. There is the Bullish Gartley and the Bearish Gartley as the two types of Gartley patterns.
The Butterfly Pattern
The Butterfly pattern has its point D extending beyond point X, and this is the difference to the Gartley pattern. There are two main types of the butterfly pattern; the Bearish Butterfly and the Bullish Butterfly.
According to Scott M. Carney, the Butterfly pattern must have a specified alignment of unique Fibonacci measures at every point. This ideal Butterfly has a measurement of 0.86 as XB. Despite this, some traders have also been successful using other measurements like 0.952 of the XB
The Bat Pattern
The Bat pattern is quite similar to the Gartley pattern expect in measurements. Bat pattern is one of the most accurate pattern and requires a much smaller stop-loss than most of others . The Bat pattern takes advantage of the powerful 0.886 XA retracement which acts at its definition element in the PRZ.
The Crab Pattern
Scott Carney considers the Crab pattern as one of the most precise patterns available. This pattern provides reversals that are extremely close to the indications of the Fibonacci numbers. The Crab pattern will also display the rapid price action movement, which can result in fast reversals around the PRZ.
Three tips on Harmonic pattern trading
If you are planning to trade with Harmonic pattern trading, here are 3 useful tips you should consider:
1. Find the potential pattern
The first step to success in this field is finding the right potential Harmonic pattern. Even though at this point you might not be sure the kind of pattern it is, you should go ahead and label the reversal points. With the reversal points labeled, it’s much easier to identify which pattern it is.
2. Measure the potential of the pattern
You can tell quite early in the process whether a pattern will succeed or not. To do this, you need to measure the potential of the Harmonic pattern. Take advantage of the Fibonacci tool (included in Harmonic Scanner) and list down your observations. If the pattern has a bullish ABCD pattern, then there is a strong buy signal.
3. Buy or sell on the pattern completion
To succeed your trading, you should buy or sell the pattern on completion. Being patient will help you avoid making any disastrous moves. Keep in mind that success, especially in Harmonic pattern trading, needs patience.