Getting to know harmonic trading patterns
What are the most common patterns used and what are their pros and cons?
Harmonic patterns refers to the concept of bringing geometric price patterns to
the next level by using Fibonacci numbers, which are utilized to generate
technical indicators that indicate specific turning points. The Fibonacci
sequence of numbers, beginning with zero and one, is formed by adding the two
preceding numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.
Harmonic patterns are technical analysis formations that can assist traders
analyse price activity and forecast where prices may move next. A trader can
make predictions about where and how much an asset's price will move by
analysing harmonic patterns in price charts.
A harmonic pattern, unlike typical chart trading patterns such as triangles,
head & shoulders and wedges, must be aligned with precise movement
requirements in order to be recognized as genuine and thus tradable.
Harmonic trading can be applied to a variety of assets such as forex, stocks
and more.
There are many different harmonic patterns, but the most common ones are the
Gartley, Butterfly, Bat, and Crab.
- Gartley Pattern - is the most commonly used pattern in harmonic trading. The Gartley pattern uses Fibonacci ratios to detect instances of breakouts, resistance and support. This pattern consists of an uptrend, a minor reversal, a smaller uptrend and a larger reverse (creating an asymmetric "M" or "W" shape).
- Butterfly patterns are classified into two types: bearish butterflies and bullish butterflies. These patterns illustrate when a trend reversal has more "power" than the original trend. Traders can use the triangles formed by the butterfly to evaluate whether a short or long position will potentially be more effective.
- The Crab pattern is suitable for traders looking for specific price changes and helps them to maximize potential opportunities on low-volatility securities. The crab pattern is very much alike with the butterfly pattern; however, it is more condensed and precise which identifies smaller price movements.
- The
Bat pattern is the most symmetrical pattern when
compared to the others. Both the bearish and bullish patterns will have
roughly equal heights on the right and left sides. Traders should not be
deceived by the appearance of this harmonic pattern, because it's quite
similar to the Gartley pattern; however, the measurements are different.
Despite
the fact that harmonic trading patterns are quite accurate when forecasting price
movement, sometimes they can be wrong; and especially if you're not familiar
with how to read them they can be a bit confusing! On the other hand, certain
patterns undoubtedly have some significant advantages.
Advantages:
1. Helps in the planning of stop losses and future estimates
2. Frequent, repetitive, dependable,
and produces high-probability setups
3. Trading rules are usually
consistent using Fibonacci ratios
4. Work smooth with defined Market
Context, Symmetry and Measured Moves rules
5. Work across all timeframes and
market instruments
6. Can be utilized with other
technical indicators, techniques, or theories.
7. Mostly accurate
Disadvantages:
1. Complex and very technical, making it tough to understand,
particularly for novice traders
2. Harmonic pattern recognition and
automation (coding) are hard to execute
3. May start having complications,
when competing patterns from the same or other swings/timeframes
4. Non-symmetric and low-ranked
patterns have relatively low risk/reward characteristics
5. It can be difficult to read the
pattern correctly and develop definitions at times
6. Can go against with Fibonacci
levels
Harmonic trading is a precise and quantitative approach to trade and essential for traders who like analysing price charts and trading patterns. Mastering these patterns though requires patience, effort, and a lot of research. The Gartley, Butterfly, Bat and Crab patterns are the most well-known patterns that traders look for. It's vital to understand that harmonic patterns don't always work, thus any movement that does not align with adequate pattern measures can lead traders off the right direction, and just like anything else, these patterns have their own advantages and disadvantages - being able to manage both could be the key for your next potential trading opportunity.
Sources:
-https://school.stockcharts.com/doku.php?id=trading_strategies:harmonic_patterns
-https://tradingstrategyguides.com/harmonic-pattern-trading-strategy/
-https://www.babypips.com/learn/forex/harmonic-price-patterns
