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What are Harmonic Price Patterns?

Harmonic price patterns are a group of chart formations which are used to identify price retracements of trends. The price levels of these potential retracements are based on the Fibonacci retracements and extensions, which you’ve already learned from our previous articles.

Remember, it’s important to wait for the entire pattern for form, before we can make any trading decisions based on them.

Let’s now explain the most common harmonic price patterns, which are

• The ABCD Pattern
• The Three Drive Pattern, and
• The Gartley Pattern

The ABCD Pattern

The ABCD pattern is the simplest harmonic price pattern, which consists of the AB and CD lines (also known as “legs”), and the BC line which is called the correction or retracement.

Key rules for the formation of the ABCD pattern are:

1. The BC line is the 0.618 Fibonacci retracement level of the initial AB line
2. The CD line is the 1.272 Fibonacci extension level of the BC line
3. The length of the AB line is equal to the length of the CD line
4. The period it takes to form the AB line is roughly the same as for the CD line

If this looks complicated to you, just look at the following graphic and everything will become clear. It’s much easier to grasp difficult technical concepts when looking at a picture. The following graphic shows a bearish and bullish ABCD pattern, depending on if the form during an uptrend or downtrend.

The Three-Drive Pattern

The three-drive pattern is very similar to the ABCD pattern, except that it has one more leg (here called “drives”) and one more correction or retracement (3 drives and 2 corrections or retracements compared to the ABCD pattern).

All retracement and extension levels are the same as with the ABCD pattern.

1. Point A is the 0.618 Fibonacci retracement level of the initial drive 1, while point B is the 0.618 Fib-level of the drive 2
2. Drive 2 is the 1.272 Fibonacci extension level of the correction A, while drive 3 is the 1.272 extension level of the correction B
3. The period it takes to form the corrections A and B, and the period it takes to form drives 2 and 3 should roughly be equal

The Gartley Pattern

The Gartley pattern is another harmonic price pattern, that is based on the basic ABCD patter. The only difference is that this pattern is preceded by a significant up- or down-move, and that the correction and retracement levels are slightly different.

As you already know how the ABCD pattern is formed, let’s jump over to look at a Gartley pattern on the following graphic.

As you can see from the chart above, all conditions for a bullish Gartley pattern have been met, and the price made a huge up-move after the complete pattern has formed! The stop-loss level can be placed just below the recent swing low (below the 1.272 extension level).

Summary

Harmonic price patterns are based on Fibonacci retracements and extensions, and you need to wait for the complete pattern for form before entering buy or sell positions.

We have covered the three most common harmonic price patterns – the ABCD pattern, the Three-Drive pattern and the Gartley pattern. The three-drive pattern is basically an extended ABCD pattern, with an additional leg (“drive”) and extension. The Gartley pattern is also very similar to an ABCD pattern, only preceded with a significant up- or down-move. Harmonic price patterns might be difficult to spot in the beginning, but with a little practice you will be rewarded with an extremely powerful tool.

Test Your Knowledge: Harmonic Price Patterns

Harmonic Price Patterns

Summary
Article Name
What are Harmonic Price Patterns?
Description
Harmonic price patterns are based on Fibonacci retracements and extensions, and you need to wait for the complete pattern for form before entering buy or sell positions.
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ForexTips
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