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Harmonics Trading Patterns Explained

Let’s talk about harmonics trading as a means of technical analysis in day trading. In this article we will look at the patterns that come from harmonics trading and how they can help us as traders to take better trades and to become more profitable.

So keep reading if you want to learn more about harmonic patterns and the harmonics trading methodology, where it comes from and more importantly how it can help us trade better.

But first let me point out that harmonic patterns are one type of indicator that can be very useful but it may or may not suit your trading preferences. Still it’s good to learn about harmonics trading as part of developing your overall knowledge in day trading.In order to become a profitable trader you need to have a strong foundation in day trading principles and market movements which will allow you to use harmonic patterns (or any patterns of indicators) to their fullest potential and become profitable.

What is Harmonics Trading? 

Harmonics trading is a methodology used in technical analysis to identify potential reversal points in financial markets. It is based on the concept of geometric price patterns that repeat themselves and can be used to predict future price movements. 

The theory behind harmonics trading is derived from the Fibonacci sequence and ratios, as well as other mathematical concepts.

How can it help traders?

Harmonic patterns in trading helps us to trade by pointing out potential reversal areas and zones.

The foundation of harmonic patterns lies in the Fibonacci sequence and its related ratios, such as the golden ratio (0.618) and its inverse (1.618), among others. These ratios are derived from mathematical principles and are believed to represent key levels of price retracement and extension in financial markets.

These patterns highlight areas where price action is likely to change direction, allowing traders to anticipate market turns before they occur.

When properly identified and validated, harmonic patterns can offer high probability trading opportunities. This is because these patterns are based on mathematical relationships and historical price behavior, giving traders a structured approach to market analysis.

Harmonic patterns complement other technical analysis tools and indicators. And as traders we can use them in conjunction with support/resistance levels, trend lines, moving averages, and oscillators to confirm trade signals and improve overall trading decisions.

the fibonacci sequence is important in harmonics trading
Harmonic patterns come from the Fibonacci sequences and are characterized by geometric shapes that are made by repeated price movement, usually with multiple swings in price direction. 

Harmonic Patterns in Trading

A harmonic pattern is a way of price pattern that follows the concept of harmonic trading. A harmonic pattern is a specific price pattern that is based on Fibonacci ratios.

And as discussed above a harmonic pattern is used to identify potential reversal points in financial markets.

Harmonic patterns are characterized by geometric shapes formed by successive price movements, typically involving multiple swings in price direction. These patterns are classified based on specific Fibonacci ratios that define their structure. The most common harmonic patterns used in trading include the Butterfly, Gartley, Bat, Crab, and Shark patterns. 

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. Harmonic patterns consist of several legs, usually labeled X-A, A-B, B-C, and C-D. Each leg represents a specific price movement, and the ratios between these legs help define the pattern’s structure.

harmonics trading patters should be used in confluence with other indicators
Harmonic patterns complement other technical analysis tools and indicators and we can use them to confirm trade signals and improve our overall trading decisions.

This method is well known for being precise. Like many pattern strategies, they work on the premise that the charts repeat patterns.

We know patterns in day trading are constant, and you can always find them in a chart, all the time and in many ways. Harmonic patterns have a huge fan base, they are respected and have a high chance of probability of success. And in my opinion it is one of the best price action patterns in day trading

But harmonic patterns should be used in confluence with other indicators and charts analytics. They can be used on top of a good support and resistance line analysis.

And together with some of my favorite indicators to use such as EMA lines and the MACD indicator.

All in all, as per my own personal trading philosophy, its best to keep things simple and this includes simplifying day trading technical analysis and indicators which will go a long way to helping you become a more consistent and profitable trader over time.

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Recommended Read: How to trade MACD

How to draw harmonic 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:

Types of harmonic patterns

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.

Recommended Read: Bull Bear Trading

bat harmonic pattern examples
Image from patternswizzard

Bat Harmonic pattern example

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.

Recommended Read: learn to become a day trader

Harmonics Trading: Wrap Up

Harmonics trading patterns are very popular among traders and for good reason. They can be very effective as a means of identifying or signalling potential reversals in price action.

As we discussed, harmonic patterns are based on Fibonacci sequences and these ratios that are useful for trading are also found just about everywhere from nature, human-made stuff, to the financial market.

Harmonic patterns can be very useful in trading but as always it’s important to use any indicator or pattern together with other indicators in order to get a more accurate picture of your trade set up.

As I always say, you shouldn’t base your trading only on one indicators or pattern even through it is recognized as a high percentage indicator like harmonic patterns. You should also use technical analysis like candlestick patterns as well as learning to use indicators in confluence with each other like basic support and resistance lines too. 

Finding what works best for you is the best option. You will eventually become a profitable trader if you don’t give up and put in the time, effort and consistency. The only way you can eventually succeed is by trading and testing a lot.

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