HARMONIC PATTERNS

BY AR. DANILO O. DONOR JR. AKA “D. ILLUSTRADER”

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Contents

š  Introduction š  Deep Crab Pattern

š  Fibonacci Sequence š  Cypher Pattern
š  Harmonic Trading Ratios š  BAMM Theory
š  PRZ š  RSI BAMM
š  AB=CD Pattern š  Trading Checklist
š  Gartley Pattern š  Harmonic Trade Management
š  Bat Pattern š  Elliot Wave Theory Confluence
š  Alternate Bat Pattern
š  Butterfly Pattern
š  Crab Pattern
Introduction

š  Harmonic Trading is a methodology that utilizes the recognition of specific structures that
possess distinct and consecutive Fibonacci ratio alignments that quantify and validate
harmonic patterns. These patterns calculate the Fibonacci aspects of these price
structures to identify highly probable reversal points in the financial markets.
š  Trading behavior is defined by the extent of buying and selling and influenced by the fear
or greed possessed by the market participants. The collective entity of all buyers
and sellers in a particular market follows the same universal principles as other natural
phenomena exhibiting cyclical growth behavior.
š  The basic understanding required to grasp this theory should not move beyond the simple
acceptance that natural growth phenomena can be quantified by relative Fibonacci
ratio measurements.
š  It was discovered by Scott Carney and published books entitled The Harmonic Trader,
Harmonic Trader Vol. 1 and 2 since 1998.
 Fibonacci Sequence

š  Fibonacci numbers are based upon the Fibonacci sequence discovered by Leonardo de
Fibonacci de Pisa (b. 1170–d. 1240).

š  The mathematical problem:

If a newborn pair of rabbits requires one month to mature and at the end of the second
month and every month thereafter reproduces itself, how many pairs will one have at the
end of “n” months?
 Fibonacci Sequence

The answer is: un

This answer is based upon the equation: un +1 = un + un -1
Although this equation might seem complex, it is actually quite simple. The sequence of the
Fibonacci numbers is as follows:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144, 233, 377… ∞ (infinity)

(0+1=1)…(1+1=2)…(1+2=3)…(2+3=5)…(3+5=8)…(5+8=13)…8+13=21)…13+21=34)…(21+34=55)...(34+55=89)
34/55 = 0.618181 ~ 0.618 55/89 = 0.617978 ~ 0.618
55/34 = 1.676471 ~ 1.618 89/55 = 1.618182 ~ 1.618

In the realm of Mathematics, the 1.618 is known as the golden ratio or Phi. The inverse (1/1.618) of Phi is 0.618,
sometimes referred to as “little Phi.” The 1.618 ratio is also commonly referred as the golden number or the
golden mean. The number is denoted by the Greek letter Phi (ϕ). The inverse of the 1.618 (phi) sometimes is
referred to as the golden ratio or golden proportion (0.618), and it is recognized by a small “p.”
Fibonacci Sequence
Harmonic Trading Ratios
Primary Retracements
Primary Derived Retracements
Secondary Retracements
Primary Projection
Primary Derived Projection
Secondary Derived Projection
Extreme Secondary Derived Projections
Potential Reversal Zone (PRZ)

š  By calculating the various Fibonacci aspects of a specific price structure,

harmonic patterns can indicate a specific area to examine for potential turning
points in price action.
š  A PRZ represents the critical areas where the flow of buying and selling is
potentially changing.
š  These harmonic zones attempt to identify the price levels where imbalanced
overbought and oversold situations are reversing—at a minimum—back to their
respective equilibrium level.
The AB=CD Pattern
The AB=CD Pattern
The AB=CD Pattern
Alternate AB=CD Pattern
Gartley Pattern
Gartley Pattern
Gartley Pattern
Gartley Pattern
Gartley Pattern
Bat Pattern
Bat Pattern
Bat Pattern
Alternate Bat Pattern
Butterfly Pattern
Butterfly Pattern
Butterfly Pattern
Crab Pattern
Deep Crab Pattern
Deep Crab Pattern
Deep Crab Pattern
Cypher Pattern
Cypher Pattern
Cypher Pattern
BAMM (Bat Action Magnet Move) Theory
RSI BAMM
RSI BAMM
RSI BAMM
RSI BAMM
Trading Checklist

š  1. Is there a pattern?
2. What is it?
3. Is there an AB=CD?
4. Where does it complete?
5. Are there three or more numbers converging in the PRZ?
6. What are they?
7. What are the time cycles (symmetry) suggesting?
8. Are there any warning signs?
9. At what point is the PRZ no longer valid? (Stop Loss)
10. How much must I risk? Am I willing to risk it?
Harmonic Trade Management

š  PRZ (Potential Reversal Zone) - is a specific area where harmonic patterns complete and
Fibonacci projections converge.

š  The Initial Profit Objective (IPO) - represents the first area to consider taking profits for the
position. Most frequently, it is either a 38.2% or 61.8% retracement from the extreme
points of the pattern.
š  Profit Protection Zone (PPZ) - is a predetermined level beyond the execution point after a small
profit has been
achieved.
š  The Stop Loss Zone (SLZ) - is the area beyond the Potential Reversal Zone that defines an
invalid setup.
š  The 0.382 Trailing Stop - is measured from the reversal point to the reversal extreme—high (bullish
setup) or low (bearish setup).
Harmonic Trade Management Model
Harmonic Trade Management Model
Elliot Wave Theory Confluence
Elliot Wave Theory Confluence
 References:

š  Carney, Scott M. The Harmonic Trader. Nevada: HarmonicTrader.com, LLC, 1999.

š  Carney, Scott M. Harmonic Trading: Volume One. Upper Saddle River, NJ: FT Press, 2010.

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