There is one simple way to identify reversals that are in a trend: through Harmonic Trading Patterns. By definition, these are trading patterns that recognize certain price patterns and the way those patterns are aligned to Fibonacci ratios. These harmonic patterns follow trading patterns and cycles which have proven over time to be repetitive. Using these patterns, it becomes possible for traders to find excellent opportunities that have low risks. Harmonic pattern trading strategy can be used within any time frame using charts, whether these charts are daily, weekly, monthly or even intra-day.
The Different Harmonic Patterns
There are 8 different harmonic patterns:
- AB=CD – This pattern appears as a four-point price structure. Furthermore, in this price structure, each of the legs is equivalent.
- Bat – This pattern has an essential ratio which is the 88.6% Fibonacci retracement. This means that it is highly accurate and requires a stop loss that is typically smaller than the other patterns.
- Butterfly – The butterfly is a highly popular pattern that has become known as the industry standard. In order for the structures to be validated, specific Fibonacci ratios are required, and the measurements require a 78.6% retracement.
- Crab – This pattern has one critical aspect which is the tight potential reversal zone. It needs a very small stop loss and normally has a volatile price action within the potential reversal zone.
- Gartley – Of all the harmonic patterns, this is the oldest and the most recognized. Every other harmonic pattern has been created from this one.
- Shark – This is a pattern that is dependent on the high 88.6% Fibonacci retracement as well as the 113% reciprocal ratio.
- 5-0 – This pattern has a structure that is unique, and includes a precise alignment of Fibonacci ratios. These help to validate the pattern. The pattern is considered to be a retracement pattern.
- Three Drives – This pattern was formed from references to the general rule of price action which possesses a three wave or a five wave structure. When there are price movements that are symmetrical and which also possess identical Fibonacci projections within a five wave price structure, they are known as the Three Drives pattern.
Harmonic Pattern trading strategy requires you to identify your entry point as well as have a clear exit strategy. Many traders look to this strategy or approach because the harmonic pattern’s success rate is relatively good. The success comes down to the use of geometry and mathematics to identify the right entry and exit points. Of all the patterns, the ones with the highest probability are AB=CD, Crab, Gartley and Shark.
Making use of a harmonic pattern indicator when you are trading ensures that the process of understanding the charts is easier. The nature of harmonic patterns means they are complex, but these indicators ensure that normal traders are able to identify the patterns more clearly.
Should a trader choose to use these patterns, it is essential they differentiate the different types of cyclical price action that appear to specific structural as well as ratio conditions.