HARMONIC
PATTERNS
INTRODUCTION
Harmonic patterns are the geometric chart patterns that are made by using specific
Fibonacci retracement and extension ratios to identify trend reversals in technical
analysis trading.
These patterns were recognized by H.M. Gartley for the first time in history. Harmonic
chart patterns are famous because of fixed Fibonacci ratios. Fibonacci is the best tool
used to do technical analysis.
Each harmonic pattern is different, unique, and has a higher winning probability. but
the main difficulty in trading harmonic patterns is to identify these patterns
correctly on the chart.
LIST OF ALL HARMONIC
PATTERNS
There are 9 harmonic patterns so far in the harmonic patterns cheat sheet that is used
to predict the market.
Gartley pattern
Bat pattern
Butterfly pattern
Harmonic shark pattern
AB=CD pattern
3-Drive pattern
Crab & Deep Crab pattern
5-0 Harmonic pattern
Cypher pattern
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GARTLEY
INVEST STATION
WHAT IS GARTLEY PATTERN
IN TRADING
The Gartley pattern is a type of harmonic pattern that is recognized on the chart by
using fixed Fibonacci ratios in trading.
It is the most widely used harmonic pattern in forex technical analysis. It is a natural
pattern that shows retracement and impulsive moves. Due to the use of the Fibonacci
tool, most technical analysts take interest in this pattern to use it for trading.
Fibonacci is a natural tool. Everything in nature follows a certain kind of pattern.
That’s why it is logical to use the Gartley pattern to forecast the market.
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TYPES OF GARTLEY
PATTERN
The Gartley pattern is further categorized into two types based on the direction of
the market.
Bullish Gartley Pattern
Bearish Gartley Pattern
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HOW TO FIND OUT GARTLEY
PATTERN?
Gartley Pattern consists of four waves in which one wave is an impulsive wave and the
other three waves make a retracement structure of this pattern.
Remember, you should try to find out the five points XABCD instead of calculating
waves. I have used the word “wave” for you to make things clear.
Each point in the Gartley pattern must be at some Fibonacci level. If a single point is
not following the Fibonacci rule, then you should avoid that setup.
Two winning trades are better than 10 losing trades.
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RULES TO RECOGNIZE
BEARISH GARTLEY PATTERN
Bearish Gartley Pattern consists of five pints XABCD. It represents the start of a new
bearish trend.
Remember that you should try to find out the bearish pattern at the top of the uptrend
or in the overbought conditions.
Follow the following rules based on Fibonacci to identify the bearish Gartley pattern
X is the initial point, and it meets point A. X must be at the top of pattern in case of
bearish pattern
AB wave must retrace to 61.8% Fibonacci level of XA wave.
BC wave must retrace to 88.6% or 38.2% Fibonacci level of AB wave. There is an
option either it can retrace to 88.6% level or to 38.2% level. But both options will
be true.
The last and final wave of Gartley Pattern, CD wave, must retrace to 78.6%
Fibonacci level of XA wave.
These are the four steps; you must follow to find this pattern on the chart. If Any of
the above steps is failing the please avoid that setup.
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RULES TO RECOGNIZE
BULLISH GARTLEY PATTERN
It indicates that a new bullish trend is about to start. It consists of five points like a
bearish pattern, but the difference is the location of each point.
Remember that you should try to find bullish Gartley patterns in the bottom or in
oversold conditions to get a high probability pattern.
Follow the following criteria to identify a bullish Gartley Pattern
X is the initial point, and it is the lowest point of this pattern
AB wave must retrace to 61.8% of XA wave in bearish direction
BC wave must retrace to either 88.6% or 38.2% Fibonacci level of AB wave
CD wave retraces to 78.6% Fibonacci level of XA wave in bullish Gartley pattern
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WHAT DOES GARTLEY
PATTERN SIGNIFY?
It signifies the completion of a wave and the start of the next wave. If you can look
at this pattern like a professional trader, then you will see two main waves.
Impulsive wave
Retracement wave
XA wave is an impulsive wave and AD is a retracement wave. The first wave represents
impulsive and the next three waves represent retracement in the market. Look in the
image below for a better understanding.
This structure of this pattern shows that it is logical to trade this pattern. After
understanding the basics, you will be able to identify this pattern correctly on the
chart.
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TRADING PLAN FOR GARTLEY
PATTERN
After identifying the harmonic chart pattern, the next step is to look for a trading
plan. Without a proper trading plan, you will end up in losses.
Because if you don’t know where or when to open or exit a trade, then you will do it
randomly. And this is not a way to do technical analysis.
To make a trading plan, you must answer these questions to yourself.
Where to find a chart pattern?
When to open a trade?
When to exit a trade?
Where to put a safe stop loss?
What risk reward ratio size you should choose?
When you will answer all the above questions, then you are good to trade on a live
account or practice on a demo account.
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THINGS TO REMEMBER
You must check the location of each pattern on the chart to filter out good chart
patterns.
For example, you should look for a bullish Gartley Pattern at the bottom of a trend.
You should avoid bullish chart patterns if the market is already in an overbought
condition. And avoid trading bearish chart patterns if the market is in an oversold
condition. Because there are more chances of reversal in an overbought or oversold
condition.
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OPEN A TRADE
When the pattern will complete at point D, then wait for the formation of a
candlestick pattern. A candlestick pattern will confirm the direction of the trade and
it allows you to wait until trend reversal.
Open a trade just after candlestick pattern (Pin bar, engulfing candlestick, three
inside up / down) confirmation.
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STOP-LOSS LEVEL
There are two choices to find a stop-loss level.
In case, if wave CD retraces to 78.6% Fibonacci level, then stop loss will be
above/below the point X.
If wave CD retraces to 38.2% Fibonacci level, then stop loss level will be few pips
above/below the candlestick pattern
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Point A is a price level that will act as a take profit level. But you can extend the
take-profit level using the 1.618 Fibonacci extension level of the XA wave. This will
increase your risk-reward ratio.
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TIMEFRAME
The best timeframes to trade harmonic patterns are 15 minutes to 4 hours for swing
and intraday traders.
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HARMONIC BAT PATTERN
INVEST STATION
WHAT’S BAT PATTERN IN
FOREX?
Bat pattern is a type of harmonic pattern which consists of five waves XABCD. Wave X
represents an impulsive move by price and ABC wave represents retracement in the price
and then wave D again represents an impulsive move in price by institutional traders.
There are different rules for bullish bat harmonic pattern and bearish bat harmonic
pattern and you will learn in detail.
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WAVE ANALYSIS OF BAT
PATTERN
The first step in the bat pattern is to recognize only the perfect pattern. We will skip
setup which is not perfect because every pattern looking like a bat pattern is not a
bat pattern. We will not apply XABCD wave everywhere on the chart but only on
perfect and setup which will approach to ideal setup. I will explain with an example
and will post the ideal setup along with a live example. See in the chart below that
wave X is a straight one. I mean this is just one wave not many waves in a single move. I
want to say that there can be many waves in a single move by the price and we will
skip a setup that has many waves in a single move. We are just focusing on a single X
wave in a single move by the market. See the difference in the chart below which one is
the perfect X wave and which one is not the correct wave.
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Now after recognizing X wave we will come to the next ABC Pattern. Here same rules
will be applied. Like in wave A there must be a single wave in a single move by the price.
Next after wave A, there will be retracement by the price which will be called wave B.
in wave B, there are further three waves A, B and C. Retracement move by the market is
of minor importance we will not focus too much on this wave. After Wave B, the price
will progress making a final wave C of the pattern. The same rules will be applied to
wave C. I meant to say there must be a single wave C in a single move by the price.
Another important rule of bat pattern is that wave A must be approximately equal to
Wave C. Wave analysis of Bat pattern is completed.
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SUPPLY AND DEMAND ZONE
FROM WAVE X
To pick a pinpoint entry or to get a high risk-reward ratio, Supply and demand is
necessary in forex technical analysis. Supply and Demand zones give us information
about the location of pending orders by institutional traders.
The next step after wave analysis is to draw a demand or supply zone and this zone
must be between Fibonacci 50, 61.8, and 78 level. If the Demand or Supply Zone is fresh
then well and good. SnD zone will always give us an entry price. Remember to include
spread when placing a pending order above or below the SnD zone. SnD refers to Supply
and Demand.
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USE OF FIBONACCI IN BAT
PATTERN
The use of Fibonacci in bat patterns is the final step. Fibonacci is used to getting the
target price (take profit price) and Stoploss price. Stoploss can be placed below or
above the Demand or Supply zone respectively. This is an aggressive setup but will give
a high risk-reward like 1:8, 1:10, or more. The safe stop-loss level is always below
Fibonacci 78 level in the case of the Bat pattern. And it depends on the situation if you
can afford aggressive stop loss then go with it and pick High RR otherwise stick to the
rules. The final setup is below in the image.
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USE OF FIBONACCI IN BAT
PATTERN
The use of Fibonacci in bat patterns is the final step. Fibonacci is used to getting the
target price (take profit price) and Stoploss price. Stoploss can be placed below or
above the Demand or Supply zone respectively. This is an aggressive setup but will give
a high risk-reward like 1:8, 1:10, or more. The safe stop-loss level is always below
Fibonacci 78 level in the case of the Bat pattern. And it depends on the situation if you
can afford aggressive stop loss then go with it and pick High RR otherwise stick to the
rules. The final setup is below in the image.
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BUTTERFLY PATTERN
INVEST STATION
Butterfly pattern consists of 4 waves, and it is a reversal chart pattern in forex
trading. To detect a butterfly pattern, specific Fibonacci retracement and extension
levels are used This pattern is found in nature which is why it is being used in forex
technical analysis.
To increase the probability of this pattern, specific Fibonacci levels are used. There are
two types of a butterfly pattern.
Bullish butterfly pattern
Bearish butterfly pattern
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BUTTERFLY HARMONIC
PATTERN RULES
It consists of four waves XA, AB, BC, and CD. Follow few simple steps to identify
butterfly pattern in forex.
Wave XA must be an impulsive wave.
Wave AB must retrace to 0.618 – 0.78 level of XA.
BC wave must retrace to 0.38 -0.88 Fibonacci level of AB.
For CD wave, there are two options either CD wave can be equal to AB or must
retrace to 1.272 extension level of wave XA.
These are four simple steps to find a good butterfly chart pattern. There are many
techniques that can be used using Fibonacci to get maximum output and a good chart
pattern.
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BULLISH BUTTERFLY
in a bullish butterfly pattern, the wave XA will be a bullish wave. wave AB and CD are
retracement waves. The final resultant wave will also be a bullish wave. the bullish
butterfly pattern is an indication of turning a bearish trend into a bullish trend.
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BEARISH BUTTERFLY
In a bearish chart pattern, wave XA will be a bearish wave. The resultant wave will be
bearish and the bearish chart pattern will convert the previous bullish trend into a
bearish trend.
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PSYCHOLOGY OF BUTTERFLY
PATTERN
The psychology behind this chart pattern is very simple. Wave XA shows the start of a
new trend to capture retail traders but then the price will retrace. Most retail
traders will try to place trades at 0.618 or 0.78 Fibonacci levels but after a minor
fake-out (BC wave) to capture more retail traders, a final CD wave will come to hunt
stop loss. After stop loss hunting, market makers will continue their move and an
impulsive wave will form.
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FIBONACCI TOOL IN
BUTTERFLY CHART PATTERN
Fibonacci retracement tool tells us a lot of things about the price. a retracement is
inversely proportional to the power in trend.
Deeper retracement means a less powerful trend.
Less deep retracement means the more powerful trend
Use this tool in a butterfly pattern. For example, if wave A – D retraces to 1.272
Fibonacci extension level of XA wave then there are many chances that it will hit 1.618
extension level of wave AD.
If wave A – D retraces to 1.618 extension level of XA wave, then there are less chances
that price will reach 1.618 extension level of wave AD, but it will hardly reach 1.272
level.
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BUTTERFLY CHART PATTERN
STRATEGY
After identification of chart pattern, the next three important steps are to find out
entry, take profit, and a safe stop loss level.
Candlestick patterns help a lot to get entry and stop-loss levels. So, we will add a
confluence of the pin bar or engulfing pattern as a confluence to our trade setup.
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ENTRY LEVEL
When the CD wave will retrace to 1.272 Fibonacci level then the next step is to look
for a candlestick pattern (only look for a pin bar or engulfing candle by switching
timeframes). If a pin bar pattern forms at 1.272 Fibonacci extension level, then place a
trade instantly.
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STOP LOSS LEVEL
There are two options for placement of stop loss.
Place stop loss just below/above the candlestick pattern.
Place stop loss below the 1.618 Fibonacci extension level.
Choose the safest option only. It depends on the situation because you must maintain a
good risk reward ratio too.
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TAKE PROFIT LEVEL
1.272 Fibonacci extension level of wave A to D will be a take profit level. Trailing stop
loss, breakeven, and many other parameters are also used to get a higher winning
ratio. Make sure to back-test properly before trading on a real account.
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