Harmonic Patterns Explained
Predicting price reversals can be very lucrative. Harmonic patterns indicate these reversals through precise price movements.
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Don’t you wish there was some mystical sign from the universe telling you what stocks to buy? 🔮
We’re not going to get to woo-woo on you here, but anyone who has worked with Fibonnaci sequences (or the “golden ratio”) has wondered about a grand plan at least once. We pretty much guarantee it. Fibonacci sequences determine the patterns of pinecones, seashells, the petals of a flower, the curve of a fingerprint—and they even occur in the patterns of the financial markets.
It’s not witchcraft—it’s mathematics. The Fibonacci sequence has been used to manipulate you—credit cards are shaped according to its ratio, so they’ll be more pleasing to us. But in the financial markets, they are naturally occurring, forming harmonic patterns that indicate a price trend might reverse or continue on.
As the Delta variant makes markets more volatile, and rapidly changing cryptocurrencies send investors back to gold, learning technical analysis can help you make sense of an ever-evolving marketplace. This guide will help you understand the basics of harmonic patterns, learn the most popular types, and start trading with them today.
- What are Harmonic Patterns?
- Types of Harmonic Patterns
- The Gartley
- The Butterfly
- The Bat
- The Crab
- The Shark
- The Cypher
- ABCD Pattern
- The Problems with Harmonic Patterns
- How Does Harmonic Pattern Software Work?
- Get Started with a Forex Broker
What are Harmonic Patterns? 💡
Harmonic patterns are a form of technical analysis which can indicate that a price is going to reverse or continue on in the same pattern. While many indicators in forex predict a general change in price or trend, harmonic patterns are highly precise, and work with very specific movements in price.
Harmonic patterns can be complicated, but they are certainly something you can learn to help you make better trades in the stock and forex markets. Once you get a handle on a few rules, you can use these indicators to supplement your market research. So if you know the Dollar is recovering in the world economy, you’ll be able to use harmonic patterns to predict how strong that trend is, and when it might change.
What Makes a Harmonic Pattern? 💭
Let’s go through the ingredients of a harmonic pattern. First, you’ll need to have five turning points in a security’s price. Each of these points is called X, A, B, C, and D.
Each harmonic pattern will have a different shape and a different Fibonacci ratio. Each of them then follows its own set of rules.
What is a Fibonacci Sequence? 🤔
Alright, we’ve said the words “Fibonacci sequence” a whole lot of times already. Let’s just make sure we’re all on the same page. Basically, a Fibonacci sequence is a series of numbers created by adding the previous two numbers together: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on to literal infinity.
These numbers then have relationships—or ratios—to each other. They create a “golden ratio,” which then has derivative ratios. It’s this ratio that’s found in nature, man-made structures, financial markets, and more.
Books have been written about the magic of the Fibonacci sequence and its meaning in the universe—so if you don’t have it completely down, it’s okay. These are the basics that you’ll need in order to understand harmonic patterns. But if you’re reading this article, we know you’re a fan of patterns already, whether that’s Fibonacci sequences or understanding how day trading impacts the stock market long-term.
Types of Harmonic Patterns 📊
And now, we’re ready to dive into the specific types of harmonic patterns! At this point, we’re assuming you know how to read charts, and you have a premium stock broker that gives you plenty of access to data. All harmonic patterns can be either bullish or bearish. Basically, we’re going to be looking at the relationships between the lines formed by these five points in each of our examples.
The Gartley 🧮
The Gartley was one of the original harmonic patterns, discovered by H. M. Gartley in the 1930s (who promptly named it after himself—no big deal). The Gartley usually follows a significant low or high, and indicates that the overall trend is changing. Bullish Gartley patterns look like an M, while bearish patterns look like a W. In each, we have our five points: X, A, B, C, and D.
The line AB retraces the movement XA, whether that is up or down. AB should retrace approximately 61.8% of XA. Then, we want to see BC retrace anywhere from 38.2%-88.6% of XA. Finally, we want to see CD retrace 78.6% of XA.
Once we hit point D, that’s a great time to make a trade. In a bullish Gartley, point D is a time to buy or enter a long position; in a bearish Gartley, point D is a time to sell or enter a short position.
The Butterfly 🦋
The Butterfly pattern typically indicates a reversal and is found at the end of a trend. Traders can identify that a trend is coming to an end, and make trades according to the new anticipated move. The Butterfly is distinct because point D extends beyond point X.
The line AB should retrace about 78.6% of XA. Then, BC should retrace 38.2%-88.6% of AB. CD should extend AB by 1.618%-2.618%. Once we get to point D, we’re in the potential reversal zone. This is a good time to trade: buy if you’re following a bullish butterfly, and sell if you’re following a bearish butterfly.
The Bat 🦇
The Bat forms when a trend temporarily changes direction, but then continues on its original direction. This can allow you to enter a trade at a good price, or make money off the minor fluctuations if you are scalping.
While the Bat looks similar to the Gartley, be careful: its ratios are not the same. In the Bat, AB should retrace 38.2%-50% of XA. Then, BC should retrace 38.2%-88.6% of AB. CD should then be an extension of 1.618%-2.618% of AB.
Once you get to D in a bullish pattern, it’s time to look for a long, though it’s recommended to wait for the price to start to rise first. In a bearish pattern, look to short near D. It’s a good idea to set a stop loss just above or below point D when entering your trade.
The Crab 🦀
We know this can get a little daunting—but hey, at least most of the harmonic patterns have fun names, right? The crab pattern was said by Scott Carney (its developer) to be one of the most precise patterns. It is similar to the butterfly, but the ratios are a bit different.
In the crab pattern, AB should retrace 38.2%-61.8% of XA. Then, BC should retrace 38.2%-88.6% of AB. You don’t want to see C exceed A’s high or low point in the crab pattern. Finally, CD should be the longest leg, and it should extend to 161.8% of XA. In some more extreme cases, CD can extend 224.0%-361.8% of BC.
In a bullish pattern, you’ll want to enter a long position when we hit point D. In a bearish pattern, enter a short position near point D.
The Shark 🦈
The shark pattern is one of the newer patterns on this list, and has just been in use since 2011. You’re cutting edge, baby! It’s called the shark thanks to its steep outside lines, plus its smaller dip in the middle, causing it to resemble a shark’s fin (Alexa, play Jaws theme).
In the shark pattern, the points are labeled O, X, A, B, C instead of our usual X, A, B, C, D. We promise it’s not just to confuse you… though we can’t really tell you why it is this way. The shark pattern indicates an upcoming reversal.
AB should retrace 1.13-1.618 of XA. Then, BC should extend to 113% of OX. B should go farther than point X in a shark pattern. If we imagine CD (with D being the continuation of the line after point C), D has a profit target of 50% of BC. The entry point for a trade is point C.
The Cypher 🤖
The cypher has simpler rules and is easier to spot than some of the other patterns, which makes it a good choice for beginning traders. It is most reliable in calmer markets, and becomes less reliable in the face of major economic news or volatility, such as the price slide Bitcoin experienced after hitting $50,000.
AB should retrace 38.2%-61.8% of XA. C should then go beyond A, and should move 113%-141.4% of A. CD should be at least 78.6% of XC. Once we reach D, we can expect the price to reverse 38.2%-61.8%.
Once you hit the D point, this is the entry point for a trade. If you see a bearish cypher pattern, D indicates a good time to sell; if you see a bullish cypher pattern, D indicates a good time to buy.
ABCD Pattern 🔡
If you’re almost worn out, we don’t blame you—but hang in there! We’ve saved one of the easiest patterns for last. The ABCD pattern is so named for AB=CD—which means you’ve already got two lines that equal each other and won’t have complicated ratios!
The BC leg should reach 0.618 of the AB leg. CD will then be the same length as AB, and it should take the same amount of time for C to reach D as it did for A to reach B.
Here you have options: you can place an entry order closer to the point C, which is our potential reversal zone, or you can wait until the pattern completes and take a long or short position at point D.
The Problems with Harmonic Patterns ⚠️
As forex trading expands across the globe, we all wish we had a perfect crystal ball. While we all wish we could see exactly how Delta anxieties will impact the Dollar, there is always a bit of unknown. No technical indicator is 100% ironclad, and expected reversals from harmonic patterns can move against you. For this reason, it’s wise to set a stop loss any time you’re entering a trade.
Besides that, there’s a potential for human error with harmonic patterns. We’re not saying you’re not a math whiz—but these are very precise patterns, and they become useless if they’re miscalculated. Be patient, and wait to place a trade until you’re sure the pattern is following the rules.
How Does Harmonic Pattern Software Work?
If checking all these numbers manually sounds like a huge hurdle to you, you’re not alone. There are some professional software services available that will draw the patterns for you, and can even send you notifications when the patterns are completed or in process. There’s a range in cost for these—especially if you want the notifications.
When you’re just starting out, it might be a good idea to get a free harmonic pattern recognition software to help you sort through the mess. But make sure to check the patterns yourself—especially free or cheap software might recognize things that are not actually patterns.
🎓 Ready for more? Learn about the many different day trading patterns.
How to Start Trading Harmonic Patterns 🎬
So, you’re ready to get started! You’ve already done the first step towards trading with harmonic patterns, which is to understand the theory behind the ratios, and learn a few of the patterns that can indicate price reversals.
Next, decide if you want to follow a bearish or bullish strategy. This will help you look out for either those big M’s or those big W’s. Set a profit and loss target before you enter a trade. Find your entry and exit points. And make absolutely sure that you are actually looking at a harmonic pattern—there’s no room for fudging with these guys!
Finally, you can always trade on a demo account before you invest real money. This can help you make sure your strategy is working and you are reading the pattern correctly. Once you’ve got a good handle on this: go get that bread!
Conclusion 🏁
Harmonic patterns might sound technical, and will have you wearing out the buttons on your calculator (do people have calculators with buttons anymore? Whatever, you know what we mean). But, they also participate in one of the most beautiful and mystical mathematical phenomena in nature—and we think that’s pretty cool.
When you’re trading harmonic patterns, be prepared to be highly rigorous and precise. If it “kinda looks like a harmonic pattern,” that just isn’t going to be good enough, Skippy. Thank you, next. But once you do identify a harmonic pattern, they can help you take advantage of price reversals and start raking in the dough. Happy trading!
Harmonic Patterns: FAQS
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Do Harmonic Patterns Work?
Harmonic patterns can indicate reversal points and show how long a price move will last. They are highly precise patterns that require specific calculations.
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Do Harmonic Patterns Work on Stocks?
Harmonic patterns can be found in all financial markets, including forex, stocks, commodities, and more.
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Are Harmonic Patterns Profitable?
When traded correctly, harmonic patterns have a strong success rate as compared to other technical indicators.
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Who Invented Harmonic Patterns?
Harmonic patterns were introduced conceptually by H. M. Gartley, and many additional patterns were introduced by Scott Carney.
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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
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