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What Are Harmonic Patterns
What Are Harmonic Patterns
There are multiple chart patterns to choose from, each of which can
be used to spot a different kind of trend. However, it is important to
note that before following any pattern, you should be confident
in your ability to perform your own technical analysis, so that you
are always able to make the best – and the fastest – trading
decisions.
Arguably the easiest pattern of all, the ABCD (or AB=CD) pattern is
composed of three movements and four points. First, there is the
impulsive movement (AB), then a corrective movement (BC), and
then another impulsive movement (DC) that goes in the same
direction as AB.
Traders can choose to either place their entry orders close to the C
point, which is defined as Potential Reversal Zone (PRZ); or they
can wait until the entire pattern completes before taking a long or
short position from the D point.
The BAT pattern
The BAT pattern gets its name from the bat-shaped end product.
Identified by Scott Carney in 2001, the BAT pattern is made up of
precise elements that identify PRZs.
It has one leg more than the ABCD pattern, and one extra point,
which we will call X. The first leg (XA) will lead to a BC retracement
movement. If the retracement up to point B stops at 50% of the
initial XA movement, then you are probably looking at a BAT
pattern.
Another Scott Carney discovery, the Crab follows an X-A, A-B, B-C
and C-D pattern, which allows traders to enter the market at
extreme highs or lows. The most important feature of the crab
pattern is the 1.618 extension of the XA movement that determines
the PRZ.
In its bullish version of the Crab, the first leg forms when the price
rises sharply from point X to point A. The AB leg retraces between
38.2% and 61.8% of XA. This is then followed by an extreme
projection of BC (2.618 - 3.14 - 3.618), which identifies a valid area
for the completion of the pattern and the potential reversal of the
current trend.
The pattern can form two formations: The bullish butterfly, which indicates
when traders should buy, and the bearish butterfly, indicating when traders
ought to sell.
Butterfly patterns help traders in spotting the end of the current move so that
they can take the trade.
The bullish and bearish butterfly patterns have the following characteristics
that can be used to identify them.
Gartley patterns usually form when a correction of the overall trend is taking
place. Bearish Gartley patterns look like ‘M’ while bearish patterns W-shaped.
The rules for a harmonic pattern to be called a Gartley pattern are:
According to Carney, one main advantage of using the Crab pattern instead of
other types of harmonic patterns is, the high risk/reward ratio because these
set ups allow you to have very tight stop losses.
It allows traders to enter the market at extreme lows or highs.
CD is the longest leg and it should extend to 161.8% of XA. CD can extend
between 224.0% – 361.8% of BC leg in some extreme cases
The Cypher Pattern
The cypher pattern has five touchpoints and four waves or legs between them.
Every touchpoint represents reversal levels, while each leg highlights a price
action.
It uses tighter Fibonacci ratios (usually less than 1), thus creating a steeper
visual appearance.
Cypher pattern rules:
When traded correctly, this advanced harmonic price action pattern can
achieve a truly remarkable strike-rate and a pretty good average reward-to-
risk ratio.
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 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.
A retracement and continuation pattern that occurs when a trend
temporarily reverses its direction but then continues on its original
course.
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.
Similarly to the butterfly pattern, this pattern allows you to enter
the market at extreme highs or lows.
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.
5-point reversal structure that was discovered by Scott Carney in
2011.
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.
Discovered by Darren Oglesbee often associated with and traded
alongside harmonic patterns.
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!
An easy-to-identify chart pattern that helps traders predict when the
price of a stock is about to change direction.
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.