We know patterns in day trading are constant, and you can always find them in a chart, all de time, in many ways. The harmonic patterns have a huge fan base, they are respected and have a high chance of probability of success. You can find the best price action pattern in day trading here. Today I want to talk more in deep about harmonic patterns.
I know how much people love charts. Most traders are chartists, many technical traders base their strategies on patterns. And I totally agree with them, the first line of good technical analysis in trading is how to find patterns. On top of a good support and resistance drawing and some line analysis. Line drawings have been used in trading to define chart patterns for a long time. Moving average and the MACD indicator (to name some of the most popular) are more recent creations. So, this tells us a lot about pattern trading.
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A harmonic pattern is a way of price pattern that follows the harmonic phenomena. The first difference to spot between normal pattern and harmonic price pattern is that they are based on Fibonacci numbers.
Like many strategies in trading, the goal of the harmonic pattern is to predict the price in the near future. This is full geometry-based trading. The Fibonacci sequence can be broken into ratios where traders believe the market will move to. Harmonic patterns are drawn between those ratios. So, we are safe to assume that the harmonic patterns and geometry are together in this trading strategy. This method is well known for being precise. Like many pattern strategies, they work on the premise that the charts repeat patterns.
The harmonic pattern rules depend a lot on the type of pattern you find. The most popular are the bat, Gartley, and the crab harmonic pattern. Since Fibonacci is composed of many ratios, all of the patterns have different rules. And all harmonic patterns are drawn in a different way each. I’m going to be showing you the most common and talking a bit about them:
As I said before, the most popular harmonic patterns are the crab, the bat, the butterfly, and Gartley. You may find the patterns visually similar, but the measurements are different. Each of them are drawn using different ratios and measurement.
To learn how to draw a harmonic pattern, we must take a type of pattern to see how it works. Let use the bullish bat harmonic pattern.
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As you can see, from X to A of the bullish version, have its first leg appearing when the price moves up from X to A. This the longest leg of the bat pattern.
From A to B the price should retrace 38 to 50% of the distance made from X to B. You must know that in order to be a valid bat pattern the A-B should never pass X.
For B to C, the price will change direction again, it should move up again. The retrace made needs to be 38.2 to 88.6% of the distance made by A and B. If B-C leg retrace above the A point the pattern is invalid.
The last point is the C to D, and it’s one of the most important rules of this harmonic pattern. Since this is the end of the pattern, the traders will place their position here. As you can see the total distance between B and D needs to be something around 128% and 261.8% of the distance made by B and C.
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The harmonic patterns are a bit complex than the normal patterns, but they have a higher success rate too. Fibonacci has a big weight in the market, and many traders use this method. Since you can find its ratios in basically everything. From nature, human-made stuff, to the financial market. It can be amazing when you figure out how to trade it and backtest it a lot.
As I always said don’t base your trading only in one thing, you should be learning candlestick patterns, learning to use indicators and other things. Find what works best for you is the best option you will have to make money but the only way you have to find it is by trading and testing a lot.