Harmonic patterns are a set of trading charts used in technical analysis. They forecast potential market movements, allowing traders to spot price trends and reversals, which can help them optimise their positions. To track shifts or inversions in price trends, all harmonic patterns leverage Fibonacci numbers to produce geometric price patterns. There are multiple harmonic chart patterns available, each tailored to recognise a unique price trend.
Let us explore harmonic patterns and understand their types, advantages, and disadvantages.
Understanding harmonic patterns
The foundation of harmonic patterns was first laid down in 1932 by H. M. Gartley. Later, Larry Pesavento, the author of Fibonacci Ratios with Pattern Recognition, expanded upon this concept.
Like the head and shoulders pattern, all harmonic patterns are structured on a particular price action. What sets them apart is that they are contingent on the application of Fibonacci tools like retracements and expansions. This aids in the formation of patterns, offering accurate and credible trade signals.
The different forms of harmonic patterns include ABCD, Bat, Butterfly, Crab, Gartley, and Shark. These can be either bullish or bearish in nature. A few may even share certain attributes; the key to successful harmonic trading lies in your ability to distinguish between these patterns.
Additional read: Double bottom pattern
Types of harmonic patterns
Here are some of the most popular types of harmonic patterns:
ABCD
Out of all harmonic patterns, the ABCD pattern is the easiest to draw and comprehend. It has four touch points and is formed with three diverse swings derived from the asset’s initial price movement. The opening move from A to B is succeeded by a retracement from B to C. Subsequently, there is another spontaneous move from C to D. Thanks to the Fibonacci levels, the segment from A to B is approximately the same as the segment from C to D.
Bat
A comparatively newer variation of harmonic patterns, the Bat pattern was discovered by Scott Carney in 2001. This chart pattern consists of five touch points and is signified by four distinctive movements. Typically, it has a restricted geometric form and does not observe substantial retracements like those in the Butterfly or Gartley patterns.
Butterfly
The Butterfly pattern commonly manifests in the trading charts. It typically determines the conclusion of a trend. This pattern also comprises five touch points and four specific movements. It can be either bullish or bearish in nature.
Crab
The Crab pattern was also developed by Scott Carney. Carney deems this trading pattern to be the most effective due to its precision. Like the Bat pattern, the Crab pattern also has five touch points with four unique movements. This pattern enables traders to benefit from extreme high or low prices by harnessing them as entry points. According to Carney, the Crab pattern empowers traders to explore high risk-reward scenarios.
Gartley
Named after the founder of harmonic patterns, the Gartley pattern has five touch points, which can either exhibit bullish or bearish tendencies. It is relatively more complex than the ABCD pattern.
Pros of harmonic patterns
- The use of Fibonacci ratios ensures that the trading processes are standardised.
- Harmonic patterns can be employed for all market instruments and timeframes.
- These patterns are reliable indicators that offer insightful trading forecasts.
- They are consistent, credible, and generate high-probability chart formations.
- These patterns perform well by adhering to the principles recommended for Market Context, Measured Moves, and Symmetry.
- They can be applied alongside additional indicators such as CCI, MACD, DeMark, and RSI.
Additional read: Intraday chart patterns
Cons of harmonic patterns
- Due to the complex technical aspects involved, it can be tricky to understand the concept of harmonic patterns completely.
- Identifying harmonic patterns and their automation is complicated.
- Determining projection or reversal areas can be difficult when here are contradictory Fibonacci retracements or projections.
- Many intricacies emerge when competing patterns are created from the same or separate swings. The same goes for timeframes.
- Other non-symmetric and low-ranked chart analysis patterns offer comparatively low risk-reward ratios.
Additional read: Trading account
Closing thoughts
Harmonic patterns are designed to forecast potential price trends and reversals. The most popular variations of harmonic patterns are ABCD, Bat, Butterfly, Crab, and Gartley. While their fairly precise and quantitative approach makes trading activities more productive, it is important to note that learning about how such patterns work requires high levels of observation and practice. Movements that contradict the exact harmonic patterns can invalidate your strategy and amplify risks. Therefore, before using harmonic patterns for your entry or exit positions, ensure you have done your homework meticulously. Likewise, ensure you utilise additional trading indicators to alter or justify your plan of action.
