Harmonic Patterns a form of tools used to predict future market movements; this is a significant advantage over other indicators. This is because indicators only show you previous but known prices and volume information without the ability to project future movements. It is important to note that Indicators are not obsolete and are still incredibly useful to traders; the two just help traders in different ways. This article will attempt to identify and briefly explain some common Harmonic patterns.
What are Harmonic Patterns?
Harmonic patterns are geometric formations based on Fibonacci Numbers and ratios.
patterns consider price waves and their relationship to determine changes in the direction of price – in other words, they respect the natural cyclical movements of prices and then identify turning/reversal points.
There are several types of harmonic patterns such as Bat, Butterfly and Crab: this article will discuss ABCD and Gartley. Looking at ABCD, we turn our attention to the two simple trends; there are 4 points for both a bullish and a bearish market. Each of these points represents a movement of prices that can be seen in different periods of time.
The price increase, leg AB is followed by a correction/retraction of BC and then the leg CD travels the same distance of leg AB following its original direction. Normally to qualify for a particular type of harmonic pattern, some criteria’s must be fulfilled, but in this case once AB=CD then the minimum distance for trading opportunity is met. This example of an ABCD harmonic pattern is the most fundamental and basic of harmonic patterns.
Another type of Harmonic pattern is the Gartley Pattern. This pattern is used in to determine buying and selling signals with price movement setbacks using the pattern of retracement and continuation i.e. trend reverses before carrying on as normal.
In both examples of Gartley patterns, we show a bullish and a bearish trend respectively. In the Bullish trend, the leg XA which has an inversion in the direction of the price in A. Using the Fibonacci ratios, we have that the retraction AB to be 0.618 (61.8%) for the price range A minus X, as shown by line XB. At point B, the price reverses back up to point C. Ideally, the leg BC kickback should be between 0.382 (32.8%) and 0.886 (88.6%) of the AB price range as shown along the AC line, not the length of the lines otherwise it will not qualify as a Gartley. At C, the price reverses again with the CD retracement, which has a leg length that should be between 1.27 (127%) and 1.618 (161.8%) of the BC range and is displayed along the BD line. Price D is the point where traders should make the low risk decision to buy/sell, since the price is about to increase/decrease (respectively according to the bullish/bearish trends).
At Tradeview, we encourage our traders to really research and understand the tools we offer here so that when it comes to trading, you are as well-equipped as you can be.
Whether it be in terms of market leading tools or in-depth market knowledge. Furthermore, to allow traders to fully utilize Harmonic patterns, we encourage you to use our online Fibonacci calculator. This article was merely an introduction to harmonic patterns and we encourage you to research further before using Harmonic Pattern as part of your real trading.
Sales Manager – Tradeview