Beginners Guide To Trading Harmonic Patterns

Table Of Contents
Harmonic Patterns in Forex 5
Gartley Harmonic Chart Pattern 5
Bat Harmonic Chart Pattern 6
Butterfly Harmonic Chart Pattern 7
Crab Harmonic Chart Pattern 8
Cypher Harmonic Chart Pattern 9
Harmonic Chart Formations Analyzed 10
Trading Strategy Using Harmonic Chart Patterns 11
Stop Loss Order when Trading Harmonic Patterns 11
Take Profit Zones when Trading Harmonic Patterns 12
Adjusting the Stop Loss Order when Trading Harmonic Patterns 13
Conclusion 14
What is the Gartley Pattern in Forex 15
Rules of the Gartley Pattern 16
Potential of the Forex Gartley Pattern 17
Bullish Gartley Pattern 18
Bearish Gartley Pattern 19
Gartley Trading Strategy 20
Gartley Trade Entry 20
Gartley Stop Loss 20

Gartley Take Profit 21
Gartley Trading Example 22
Bullish Gartley Pattern Example 22
Bearish Gartley Pattern Example 23
Conclusion 24
What Is The Bat Pattern? 25
Rules For Identifying The Bat Pattern 26
Bullish Bat Pattern 28
Bearish Bat Pattern 29
Bat Pattern vs. Gartley Pattern 30
Trading the Bullish Bat Pattern 31
Bullish Bat Pattern Trading Strategy 32
Trading The Bearish Bat Pattern 33
Summary 36
What is the Forex Butterfly Pattern? 36
Structure of the Butterfly Formation 36
Fibonacci and the Butterfly Pattern 37
Bullish Butterfly Chart Pattern 39
Bearish Butterfly Chart Pattern 40
Confirmation of the Harmonic Butterfly Trade 40
Forex Butterfly Strategy 41
Entry Point 41
Stop Loss 42
Take Profit 42
Bearish Butterfly Pattern Example 43
Bullish Butterfly Pattern Example 45
Fibonacci Retracement Tool Settings 46
Conclusion 47
What is the Harmonic Crab pattern? 47
Drawing the Harmonic Crab pattern 49
Crab pattern vs. Butterfly pattern 50
The Deep Crab pattern 51
Tools for Locating Harmonic patterns in Forex 54
Harmonic Shark Pattern 56
Bullish Shark Pattern 58
Bearish Shark Pattern 60
Shark pattern vs Cypher 61
Shark Pattern Trading Strategy 62
Bullish Shark Pattern Setup 63
Bearish Shark Pattern Setup 64
Summary 66
Cypher Harmonic Pattern 66
Cypher Pattern Rules 68
Bullish Cypher Pattern 69

Bearish Cypher Pattern 70
Cypher Chart Pattern vs Shark Chart Pattern 71
Cypher Trading Strategy 72
Bullish Cypher Trade Example 73
Bearish Cypher Trade Example 75
Summary 76
What is the AB=CD Pattern 76
Bullish AB=CD 78
Bearish AB=CD 78
Fibonacci Ratios in the AB=CD Pattern 79
AB=CD Trading System 80
AB=CD Entry Point 80
AB=CD Stop Loss 81
AB=CD Take Profit 82
Trading the ABCD Setup 83
Conclusion 86
Harmonic Three Drives Pattern 87
Identifying And Drawing The 3 Drives Pattern 88
Bullish 3 Drives Pattern 90
Bearish 3 Drives Pattern 91
Trading The Three Drives Pattern 92
Bullish Three Drives Setup – Trade Example 94
Bearish Three Drives Formation – Trade Example 95
Summary 97
Harmonic Patterns in Forex
Harmonic chart patterns are considered harmonic because these structures

have an integral relationship with the Fibonacci number series. Identi ed
harmonic patterns conform to crucial Fibonacci levels. As you may already
know, Fibonacci numbers can be seen all around us in the natural world, and
these harmonic ratios are also present within the nancial markets.
Harmonic trading in the currency market includes the identi cation and the
analysis of a handful of chart gures. In most of the cases these patterns
consist of four price moves, all of them conforming to speci c Fibonacci
levels. Therefore, a harmonic chart pattern should always be analyzed using
Fibonacci Retracement and Extensions tools.
For the more inclined, there are also several harmonic indicators and
software programs that will automatically detect various harmonic trading
patterns. The most widely traded harmonic patterns include the Gartley
pattern, Bat Pattern, Butter y Pattern, Cypher pattern, and the Crab pattern.
Gartley Harmonic Chart Pattern
The Gartley pattern was introduced by H.M Gartley in his book, Pro ts in the
Stock Market, The Gartley pattern is sometimes referred to as Gartley 222,
and because 222 is the exact page in the book where the Gartley pattern is
revealed.
So the Gartley pattern is the oldest recognized harmonic pattern and all the
other harmonic patterns are a modi cation of the Gartley pattern. Let’s now
take a look at the legs within the Gartley formation:
XA: This could be any move on the chart and there are no speci c
requirements for this move in order to be part of a harmonic pattern.
AB: This move is opposite to the XA move and it should be about 61.8% of the
XA move.
BC: This price move should be opposite to the AB move and it should be
38.2% or 88.6% of the AB move.
CD: The last price move is opposite to BC and it should be 127.2% (extension)
of BC move if BC is 38.2% of AB. If BC is 88.6% of AB, then CD should be 161.8%
(extension) of BC.
AD: The overall price move between A and D should be 78.6% of XA
The image below illustrates a Bullish and Bearish Gartley pattern:
The black lines on the image above show the four price moves of the chart
patterns. The blue lines and the percentage values show the retracement
relation between each of these levels. The green arrows show the potential
price move of the pattern.
Bat Harmonic Chart Pattern
The Bat harmonic pattern is a modi cation of the Gartley pattern, and was
discovered by Scott Carney. The lines are a bit more symmetric and the
pattern’s most important ratio is the 88.6% Fibonacci retracement:
AB: This move is opposite to the XA move and it should be about 38.2% or
50.0% of XA.
BC: This move should be opposite to the AB move and it should be 38.2% or
88.6% of the AB move.
CD: The last price move is opposite to BC and it should be 161.8% (extension)
of BC move if BC is 38.2% of AB. If BC is 88.6% of AB, then CD should be 261.8%
(extension) of BC.
AD: The overall price move between A and D should be 88.6%% of XA

This is how the bullish and the bearish Bat harmonic chart patterns appear:
As you see, the Bat harmonic pattern is similar to the Gartley pattern,
however, the retracement levels are different. Both are considered internal
patterns because the ending D leg is contained within the initial XA move.
Butterfly Harmonic Chart Pattern
This is another modi cation of the Gartley harmonic pattern, which consists
of the same four price moves.
The retracement levels, though, are different, and this is considered and
extension pattern as the ending D leg extends outside the initial XA leg
AB: This move is opposite to the XA move and it should be about 78.6% of XA.
CD: The last price move is opposite to BC and it should be 161.80%

(extension) of BC move if BC is 38.2% of AB. If BC is 88.6% of AB, then CD
should be 261.80% (extension) of BC.
AD: The overall price move between A and D should be 127% or 161.80% of XA
This is how the bullish and the bearish Butter y harmonic chart patterns
look:
Notice that the Butter y harmonic chart pattern indicates that the AD move
should go beyond the initial price move (XA). In this manner, the Butter y
harmonic pattern is considered an external formation.
Crab Harmonic Chart Pattern
The Crab harmonic pattern has some similarities with the Butter y chart
pattern. The Crab pattern actually looks like a stretched Butter y sideways.
The Crab also suggests that the last price move goes beyond the initial
move, where a Fibonacci extension should be used. The Fibonacci levels
used to identify the pattern are described below:
AB: This move is opposite to the XA move and it should be about 38.2% or
61.8% of XA.
CD: The last price move is opposite to BC and it should be 224% (extension)
of BC move if BC is 38.2% of AB. If BC is 88.6% of AB, then CD should 361.80%
(extension) of BC.
AD: The overall price move between A and D should be 161.80% of XA
This is how the Crab harmonic chart pattern looks like:
Cypher Harmonic Chart Pattern
The Cypher chart pattern is similar to the other chart patterns we already
discussed, however, it has one speci c difference. The BC move of the
Cypher chart pattern goes beyond the XA move. This means that we use an
extension level on AB in order to measure the BC output. Below you will nd
the list of the Cypher pattern retracement levels:
AB: This move is opposite to the XA move and it should be 38.2% or 61.8% of
XA.
BC: This move should be opposite to the AB move and it should be

anywhere between 113.0% and 141.4% of the AB move.
CD: The last price move is opposite to BC and it should be 78.6% of the
general XC move.
See below the structure of the Bullish and Bearish Cypher formation
Again, the important consideration of this pattern is that the BC move goes
beyond XA and it is an extension of AB. Therefore, we measure CD with a
retracement of XC and not on BC. This is so because the general move is XC,
which is bigger than the partial BC.
Let’s now identify a couple harmonic trading examples on a chart.
Harmonic Chart Formations Analyzed
The image below will give you an example of an actual harmonic pattern on
a candlestick chart:
This is the H4 chart of the USD/CAD currency pair for May, 2015. The
formation we are looking at is a Butter y pattern.
We start with a bullish XA move. Then comes a contrary AB move which is

78.6% of the XA move. The next BC move is opposite to AB and it takes 88.6%
of AB. CD reaches 161.8% extension of BC and also 127% extension of XA.
These retracement levels con rm the presence of a bullish Butter y chart
pattern. As you see, the USD/CAD price records a signi cant increase after
the con rmation of the pattern.
Let’s look at another one now:
This is the H4 chart of the EUR/USD for Nov – Dec, 2012 showing a bullish
Cypher harmonic pattern.
We start with the AB move, which takes about 38.2% of the XA move. Then
comes the BC move which approximately reaches the 141.4 extension of the
AB move. The last move we identify is the CD move, which is about 78.6% of
the big XC move. This is how we identify the bullish Cypher pattern. As you
see, after creating point D, the EUR/USD price starts a solid price increase.
Trading Strategy Using Harmonic Chart Patterns
When trading with harmonics it is important to recognize the entry point at

Point D, but equally important is to have a sound exit strategy. Let’s take a
look at how we can trade harmonic patterns that incorporates simple risk
management rules.
Stop Loss Order when Trading Harmonic Patterns
There are several different methods for managing a trade once you have
identi ed a harmonic setup. A simple but effective method to implement
would be wait for price con rmation at the D point and place a stop loss just
beyond that immediate swing point. Have a look at the image below:
This is the same rst example with the bullish Butter y chart pattern. This
time we have indicated the potential place where a Stop Loss order should
be placed when trading the pattern. Notice that the Stop is relatively tight in
comparison to the following price increase. This provides for a very attractive
return to risk ratio when trading the pattern. And this is why harmonic
setups are such great chart patterns to trade. There is very little left to
judgement because the Fibonacci relationships within harmonic patterns
gives us an exact location of the potential turning point. If the price goes
beyond that point, the pattern fails and we simply do not enter the market.
Take Profit Zones when Trading Harmonic Patterns
Since we already know when to enter the market and where to place our
stop loss, it is time to discuss how long we should stay in the trade. I will now
introduce you the potential target levels of a harmonic chart pattern.
As you may have already guessed, the targets of a harmonic pattern should
be related to the levels of the pattern itself. Let’s now include these target
levels on our bullish Butter y example:
Again, this is the same bullish Butter y example on the USD/CAD. This time,
in addition to the Stop Loss level, we have added four potential targets in
front of the price move.
The rst target is related to point B on the chart. It is the level, which
indicates the price drop during the AB decrease. The second target marks
the C point on the chart and the price top after the BC increase. The third
target is the high which appears as a result of the XA increase. As you see,
these are the three targets which are related with the levels of the Butter y
pattern. However, we have a fourth target as well which price should
approach in cases where we complete the previous targets. The fourth
target is indicated by the 161.8% extension level of the CD price move.
Notice that the price increase continues beyond the fourth target in this
example. Therefore, one could also employ a trailing stop to stay with his
long position until the price show signs of weakening. Keep in mind, there is
no one standard way of managing your pro t targets when trading
harmonic patterns, but it is important to maintain consistency in whichever
exit methodology that you utilize.
Some traders like to use additional trading tools to con rm harmonic signals.
Some of the more popular trading indicators to get exit signals when trading
harmonics are Moving Averages, MACD, or Stochastics. In additional, one
should always keep an eye out on higher time frame Support and
Resistance levels in conjunction with harmonic setups. Also, higher
Fibonacci extension levels could be used in order to determine further price
targets when trading harmonic chart patterns.
Adjusting the Stop Loss Order when Trading Harmonic

Patterns
An important consideration when trading harmonic patterns is the use of a

trailing stop to take advantage of larger price moves and protect ones capital
as prices begin to move in our intended direction. It is a good idea to modify
your Stop Loss based on the price action in order to lock in pro ts. The image
below will show you an example of how to adjust your Stop Loss order
according to the price move:
We use the same USD/CAD chart with the bullish Butter y pattern.
Every time the price completes a target, we adjust the Stop Loss order to be
located below the lowest bottom at the time of the target break. On our
image above we see that this guarantees us a stay in the market even after
the fourth target is completed.
Conclusion
The harmonic chart patterns are an advanced form of chart pattern analysis
based on Fibonacci numbers.
The basic harmonic patterns consist of four price moves which are contrary
to each other. The four legs are named XA, AB, BC, and CD.
The difference between the harmonic patterns is the Fibonacci levels they
retrace or extend to.
The oldest recognized harmonic pattern is the Gartley pattern. The

other harmonic chart gures are Fibonacci modi cations of the Gartley
pattern. These are:
Bat Pattern
Butter y Pattern
Crab Pattern
Cypher Pattern
We should always implement sound risk management rules when trading

harmonic patterns, or any strategy for that matter.
Stop Losses should be placed right beyond the D point after the price
con rms the pattern and then reverses the move.
There are four targets that can be used when you trade harmonics – the
A, B, and C swing levels and the 161.8% Fibonacci extension of the CD
price move.
What is the Gartley Pattern in Forex
I am a big fan of trading with harmonic patterns in the spot forex market
because they provide very precise conditions for evaluating the validity of
the patterns, and offer a high reward to risk ratio when traded properly. There
are various patterns which fall into the “harmonic” group, but today we will
highlight one of the oldest recognized harmonic patterns – the Gartley
pattern. In the following material, will dive into some rules and best practices
around trading the Gartley pattern.
Gartley is a special chart pattern within the harmonic pattern universe. And
as with the other harmonic trading patterns, it must meet its own speci c
Fibonacci levels in order to qualify as a valid formation. H.M Gartley, who lived
during the same era as R.N Elliott and W.D Gann, introduced the Gartley
pattern to the world in his book entitled “Pro ts in the Stock Market” which
he wrote back in 1935. In the book and speci cally on page 222, H.M. Gartley
discusses the Gartley pattern and refers to it as “one of the best trading
opportunities” in the market. And so, the Gartley pattern is also sometimes
referred to as Gartley 222 or the 222 pattern by some harmonic traders.
The pattern resembles an M/W shape on the chart, depending on whether it

is a bullish or a bearish Gartley. As such, the pattern consists of ve points on
the chart. These points are marked with X, A, B, C, and D. This is how a Gartley
harmonic pattern appears:
This is a sketch of the Gartley chart gure. The pattern starts with point X
and it creates four swings until point D is completed.
Rules of the Gartley Pattern
Since the pattern is a member of the Harmonic family, each swing should
conform to speci c Fibonacci levels. We will now go through each
component of the Gartley structure:
XA: The XA move could be any price activity on the chart. There are no
speci c requirements in relation to the XA price move of the Gartley chart
formation.
AB: The AB move should be approximately 61.8% of the XA size. So, if the XA
move is bullish, then the AB move should reverse the price action and
should reach the 61.8% Fibonacci retracement of XA.
BC: The BC move should then reverse the AB move. At the same time, the
BC move should nish either on the 38.2% Fibonacci level, or on the 88.6%
Fibonacci level of the prior AB leg.
CD: The CD should be a reversal of the BC move. Then if BC is 38.2% of AB,
then CD should respond to the 127.2% extension of BC. If BC is 88.6% of AB,
then CD should be the 161.8% extension of BC.
AD: Then there is the last rule for the Gartley pattern. When the CD move is
complete, you should measure the AD move. A valid Gartley on the chart will
show an AD move, which takes a 78.6% retracement of the XA move.
Refer to the illustration below which will help you visualize these rules for the
Gartley pattern:
If these ve rules are met, you can con rm the presence of the Gartley
pattern on your chart.
Potential of the Forex Gartley Pattern
But what is the potential, once the Forex Gartley Pattern has been
con rmed? Remember, the expected outcome of the Gartley gure could
be bullish or bearish depending on whether we have a bullish Gartley or a
Bearish Gartley.
Let’s take a closer look:
Bullish Gartley Pattern
The Bullish Gartley is the one we took as an example in the images above. It
starts with a bullish XA move. AB is then bearish. BC is bullish, and CD is
bearish again.
In this manner, the expectation of the pattern is a reversal of the CD move.

This means that the expected outcome from the bullish Gartley is a price
increase from Point D:
This is the bullish Gartley. The green arrow on the image represents the
expected price move of the bullish Gartley pattern. The full target of the
pattern is the 161.8% Fibonacci extension of the AD move, which resembles
the AB=CD pattern upon completion. However, there are three intermediary
targets before that.
Target 1: B Swing
Target 2: C Swing
Target 3: A Swing
Target 4: E (161.8% of AD)
These four levels on the chart are the four minimum targets of the bullish
Gartley. That doesn’t mean that the bullish trend will end when the price
completes point E. You are always free to use additional price action rules or
a trailing stop to attain further out exit points on your trade.
Bearish Gartley Pattern
The bearish Gartley pattern is the absolute equivalent of the bullish Gartley
pattern, but inverted. In this manner, the bearish Gartley has a bearish XA
move, a bullish AB move, a bearish BC move, and a bullish CD move. This
means that the potential of the bearish Gartley is a price decline from Point
D. The generally expected price target of the bearish Gartley is the 161.8%
extension of the AD move. Below you will see a sketch of the bearish Gartley
setup.
As you see, the gure is absolutely identical to the bullish Gartley, but
everything is upside down. Therefore, the pattern shares the same target
rules with the bullish Gartley:
Target 1: B Swing
Target 2: C Swing
Target 3: A Swing
Again, when the target at point E is completed, it is not necessary to close

your short trade out entirely. You can always stay in for a further price
decrease by using price action rules or a trailing stop.
Gartley Trading Strategy
Now that you are familiar with the Gartley identi cation rules, I will show you
a simple way to trade this chart pattern. Our Gartley trading method
objectively pinpoints the proper location of the entry point, stop loss, and
exit point.
Gartley Trade Entry
In order to enter a Gartley trade you should rst identify the pattern and
then con rm its validity. To draw the Gartley pattern on your chart, you
should outline the four price swings on the chart and check to make sure
they respond to their respective Fibonacci levels. Make sure to mark each
price action swing with the relevant letter X, A, B, C, and D. This way you will
be able to gauge the general size of the pattern and have a clear idea about
the parameters. If you have a bullish Gartley gure on the chart, you can
open a long trade when you identify these two conditions:
CD nds support at 127.2% or 161.8% Fibonacci level of the BC move.
The price action bounces in a bullish direction from the respective Fibonacci
level.
When the Gartley pattern is bearish, then you use the same two rules to
open a trade. However, in this case your trade will to the short side.
Gartley Stop Loss

Regardless of your preferred entry signal, it is always recommended that you
use a stop loss order. This way you will protect yourself from any rapid or
unexpected price moves. If you open a bullish Gartley trade, your stop loss
order should be located right below the D point of the pattern. If you open a
bearish Gartley trade, your stop loss order should be located right above the
D point of the pattern. Below you will nd an image showing you the proper
location of a Bullish Gartley stop loss order:
The sketch above shows you the exact location of a properly positioned stop
loss order of a bullish Gartley pattern.
Gartley Take Profit
When you open your Gartley trade and you place your stop loss order, you
expect the price to move in your favor, right? And if and when it does, you
should know how long you expect to stay in the trade.
My preferred method for trading Gartleys is to enter a full position after the D
bounce and then scale out at different levels. As mentioned earlier, the
targets that I look for are as follows:
Target 1: B Swing
Target 2: C Swing
Target 3: A Swing
Then if the price momentum continues to show signs of strength, you can
opt to keep a small portion of the trade open in an attempt to catch a large
move. You would want to use price action clues such as support/resistance
techniques, trend lines, channels, and candle patterns to nd an appropriate
nal exit point. But in general, if the price action shows no signs of
interrupting the new trend, just stay in it for as long as you can.
Gartley Trading Example
Now we will apply the rules we discussed above into a practical trading
example using a Gartley indicator. We will open trades after identifying the
pattern rules and after the price action bounces from the 127.2%/161.8%
Fibonacci retracement level of BC. We will place a stop loss order beyond
point D on the nal Gartley swing. We will attempt to stay in our trades until
price reaches the four targets we discussed. Ok so let’s see how this all looks:
Bullish Gartley Pattern Example
The image below is a bullish Gartley pattern example:
You are now looking at the weekly chart of the NZD/USD Forex pair. The
image illustrates a Gartley pattern using a Metatrader MT4 Gartley indicator.
The gure consists of a bullish XA, bearish AB, bullish BC, and bearish CD. AB
is 61.8% of XA, BC is 88.6% of AB, CD is the 161.8% extension of BC. At the same
time, AD is 78.6% of XA. Therefore, we con rm the presence of a bullish
Gartley pattern on our NZD/USD chart.
Since this is a bullish Gartley setup, the expected price move is to the
upside. For this reason, we would prepare to buy the NZD/USD pair when CD
nishes at the 161.8% of BC and the price action bounces upwards. When
this happens, we want to go long putting a stop loss below point D as shown
on the image.
The rst target of this long trade is located at the level of point B. The price
bounce after the creation of point D is sharp and it instantly completes this
target. The second target is at point C and it gets accomplished 7 periods
after we buy the NZD/USD Forex pair based on our bullish Gartley strategy.
Then 10 weeks later the price action reaches the level of point A, which is the
next target on the chart. However, we are not done yet. We have our last
target on the chart. It is located at the 161.8% Fibonacci extension of the AD
price move. This target takes a little bit longer to be complete. Twenty-seven
periods after the previous target is achieved, the price action manages to
reach the 161.8% extension of AD.
We can attempt to stay in this trade for further pro t and use price action
signals to guide us. As you see, the price creates a couple more peaks on the
chart. Notice the adjoining bottoms of these peaks create a small bullish
trend line on the chart (yellow), which we can use to settle a nal exit point
on the chart. The breakdown through this trend line is very sharp and it is
created by a big bearish candle. In this case, we would have been better off
had we exited the trade altogether at the last xed target.
Bearish Gartley Pattern Example
Now we will demonstrate an example using the bearish Gartley pattern

This is the H4 chart of the AUD/CHF Forex pair. The image illustrates another
Gartley pattern, where we apply our trading strategy.
The gure starts with a bearish XA move. AB is then bullish and BC is bearish.
CD then reverses the bearish BC move. AB takes 61.8% of XA. BC is the 88.6%
level of AB. CD reaches the 161.8% extension of BC. When the CD move is
nished and the price creates a bearish bounce from the 161.8% extension of
BC, we con rm the validity of a bearish Gartley Pattern. In this manner, we
would prepare to sell the AUD/CHF Forex pair, placing a stop loss order
above the swing at point D.
After we sell the AUD/CHF, and place our stop loss, we want price to start
pursuing our targets. The rst target at point B gets completed at the
moment of the bearish bounce after the CD move. Therefore, this target is
accomplished even before we manage to enter the market. The next target
is located on the level of point C and the price action reaches it 14 periods
after the short Gartley signal. The price then proceeds its down move and 6
periods later the AUD/CHF pair reaches the target at point A.
Now there is one more target left, which is located at the 161.8% extension of
the AD move. Fourteen periods after price reaches the A target, we see that
the nal target is reached. Therefore, you could close the deal here and
collect your realized pro t.
Conclusion
The Gartley formation is part of the harmonic family of patterns.
Other names for the Gartley pattern:

Gartley 222 pattern
222 pattern
The pattern looks like an M/W and its swings are designated with the points
X, A, B, C, and D.
As a harmonic pattern, the Gartley swings should correspond to speci c

Fibonacci levels:
XA could be any move on the chart.

AB should be 61.8% of XA.
BC should be either 38.2% or 88.6% of AB.
If BC is 38.2% of AB, CD should be the 127.2% extension of BC. If BC is
88.6% of AB, CD should be the 161.8% extension of BC.
The general AD move should be 78.6% of XA.
There are two types of Gartley patterns:
Bullish Gartley Pattern: XA is bullish; AB is bearish; BC is bullish; CD is

bearish
Bearish Gartley Pattern: XA is bearish; AB is bullish; BC is bearish; CD is
bullish
The price targets of the Gartley pattern are:
Target 1: The level of point B

Target 2: The level of point C
Target 3: The level of point A
You can attempt to stay with your trade beyond the fourth target by
using price action clues or a trailing stop.
The rules for trading the Gartley chart gure are as follows:
Open a trade when the price completes the CD move and bounces in
the opposite direction.
Put a stop loss at the end of the CD move beyond the D point in order
to protect your trade.
Attempt to stay in the trade for each of the four targets.
If you want to extend your gains, you can opt to keep a portion of the
trade open in order to try to catch a larger move.
What Is The Bat Pattern?

Fibonacci-based approaches are quite popular trading methods used by
both novice and seasoned traders. Trading harmonic patterns is a subset of a
Fibonacci trading methodology. One of the higher probability patterns that
harmonic traders use is the Bat pattern setup. It offers a distinct edge, and a
very favorable risk to reward pro le when traded correctly. We’ll discuss the
speci c rules for identifying the bat pattern and some ideas for trading it in a
pro table manner. So, let’s get started.
The bat pattern is a harmonic trading pattern that was developed by Scott
Carney. He wrote about the pattern in his series of books, entitled Harmonic
Trading.
It is one of several different harmonic trading patterns that provides a trader

a rule-based methodology, and combines pattern recognition with
Fibonacci analysis. A few other popular harmonic patterns in forex include
the Gartley, Butter y, and Crab patterns. Of these the Gartley pattern is the
most similar to the Bat pattern in terms of the overall pattern structure. We
will be comparing and contrasting the Bat pattern and the Gartley in the
later section.
The Bat pattern is a ve point chart pattern that can often foretell a reversal
in the market. It relies heavily on speci c Fibonacci ratios to occur at various
points within the structure. These are fairly strict measurements that need
to be met in order for the pattern to be labeled accordingly as a bat pattern.
We’ll be de ning each of these important relationships shortly, but for now,
it’s important to understand that the Bat pattern has a deep retracement
against the prior price move, and often resembles the shape of the letter M,
in the case of a Bullish Bat, and the shape of the letter W in the case of a
Bearish Bat formation.
Rules For Identifying The Bat Pattern
As mentioned earlier, the Bat pattern is a ve-point pattern with very

speci c Fibonacci relationships. Below you will nd an example illustrating
the structure of the bat pattern:
So, here’s how we go about drawing the harmonic bat pattern. First, notice
here the ve points that comprise the bat pattern. These ve points make
up the separate legs within the overall structure. These legs are labeled as
per follows – the XA leg, the AB leg, the BC leg, and the CD leg.
So anytime that we are referring to a particular swing within the Bat pattern,
we would identify it as one of these speci ed legs.
Let’s now take a little closer look at each of these four legs within the bat
structure:
XA leg – the XA leg is the initial move within the structure. It is often an
impulsive leg with a relatively sharp price movement. This leg is the longest
leg within the overall structure and is the kickoff of the pattern.
AB leg – the AB leg is the initial retracement that occurs against the XA leg.
This retracement is often the Fibonacci retracement of 38%, or 50% of the XA
leg.
BC leg – the BC leg moves in the direction of the XA leg; however it must be
contained within the extreme of point A. The BC leg usually retraces the
prior AB leg within the 38 to 88% range.
CD leg – the CD leg is the nal leg within the Bat structure, and the most
signi cant part of the pattern in terms of the Fibonacci measurements. The
CD leg should retrace the XA leg by 88%. In addition, but less important, is for
point D to represent a 161% or 261% extension of the BC leg.
These are the primary rules for recognizing the bat pattern on the chart.
When you’re starting out learning how to identify and label the bat pattern,
it helps to perform these measurements manually with the different
Fibonacci tools so that you can become intimately familiar with the rules
behind them.
But eventually, you will want to opt for a charting platform that offers
harmonic pattern recognition technology. At the very least you can opt for a
harmonic trading indicator. This can help you label the Bat pattern in a much
quicker and ef cient manner.
Bullish Bat Pattern
The Bat pattern can be a bullish formation, or a bearish formation. We will

start off by taking a closer look at the bullish bat pattern.
Below you will nd an illustration of the bat pattern and its associated
Fibonacci ratios:
Notice on the above illustration of the bullish bat pattern, the initial XA leg is
bullish, and kicks off the overall pattern. Next we can expect the AB leg to
retrace the XA leg by either the 38 or 50%. The termination of this particular
retracement is referred to as the B point. And this Fibonacci ratio seen at the
B point is very important in the overall makeup of the Bat structure.
After the B point is established, we will see prices will move higher in the BC
leg. The BC leg will typically retrace the AB leg within the range of 38 to 88%
range. Finally at the termination of point C, the price action will begin to
move lower within the CD leg. The D point of the CD leg represents the
termination of the Bat pattern. The expectation is for price to terminate at or
near the 88% retracement level, completing the harmonic bat formation,
and putting bullish pressure on future price action.
Bearish Bat Pattern
The bearish variation has the opposite implication as the bullish Bat pattern.
Let’s now illustrate how the bearish Bat pattern appears, and the price
movements within each of its respective legs.
Here you can see the bearish variation and the associated b ratios for the
Bat Pattern:
In a bearish Bat pattern, the initial XA leg will be bearish. The following leg will
be the AB leg and will retrace the XA leg upwards by the Fibonacci ratio of
38% or 50%. This again marks the B point of the bearish Bat pattern. Again,
the B point holds a special signi cance within the bat structure, and, it
needs to terminate at one of these two speci c levels in order to correctly
label the structure as a bat.
As we will see later, a deeper retracement at the B point can invalidate this
pattern, and instead, can lead to the classi cation of the pattern as a Gartley.
Moving on, the BC leg will ensue and will retrace its prior AB leg by 38 to 88%.
Finally, the last leg within the structure, the CD leg, will move higher and
terminate at or near the 88% retracement of the initial XA leg. Once this
happens, it con rms the bearish Bat structure, signaling an imminent
reversal as prices should begin the trade lower.
Bat Pattern vs. Gartley Pattern
Some traders who utilize harmonic patterns in their trading get confused
between the Bat pattern structure and the Gartley pattern structure. So,
let’s take a moment to clarify the primary differences between these two
harmonic patterns, so as to ensure that we are classifying and ultimately
trading these patterns correctly.
Before we do that, it helps to understand the difference between an internal

pattern and an external pattern as it relates to Fibonacci based harmonic
structures. An internal pattern is one wherein the nal point within the
overall structure is contained within the extreme of the X leg, which is the
rst point within a harmonic structure. An external pattern is one wherein
the nal point within the overall structure extends beyond the extreme of
the X leg.
Both Bat and the Gartley patterns are considered to be internal patterns,
because both have their D termination point, within the hundred percent
retracement of the XA leg. On the contrary, other harmonic patterns such as
Butter y patterns and Crab patterns are considered to be external patterns,
because both have their D termination point outside the 100% retracement
of the XA leg. This is considered an extension of the XA leg.
Now going back to the primary difference between the Bat and Gartley
patterns, we now know that both are considered internal patterns and as
such the D point will terminate within the XA leg. The two primary
characteristics that differentiates a Bat formation from the Gartley formation
is the Fibonacci ratio seen at point B, and the Fibonacci ratio seen at point D.
More speci cally, a Bat pattern predominantly has a B point terminating at
either the b retracement of 38% or 50% of the XA leg. On the contrary, the
Gartley pattern predominantly has a B point terminating at the b
retracement of 61% of the XA leg. This is the rst important difference.
The second distinction between the Bat and Gartley can be seen at the
termination of the D leg. That is to say that the Bat will have a deeper
retracement then the Gartley. The Bat patten will be an 88% retracement of
the XA leg, while the Gartley pattern will be a 78% retracement of the XA leg.
It’s also worth noting that within the Gartley formation, the AB leg will often
be of equal length to the CD. This occurrence is often referred to as AB=CD.
Trading the Bullish Bat Pattern
Now that we have laid out the foundations of the harmonic Bat pattern, let’s
move on and discuss some trading strategies that we can implement when
we identify a Bat pattern. We will start by taking a look at trading the bullish
Bat pattern. Below you will nd an illustration of the bullish Bat pattern. Here
we have added a few notations including the Entry point, Stop Loss point,
and Targets 1,2 and 3:
So the rst thing that we need to do, is to apply our various Fibonacci tools
to con rm whether or not a potential Bat pattern can be veri ed on the
price chart. Keep in mind that the two most important levels that we want
to look at and con rm are points B and D. We want to ensure that Point B is
either a 38 or 50% retracement of the XA leg and that point D is an 88%
retracement of the XA leg. When the Fibonacci ratios have been con rmed,
then we will need to have a plan to trade the bat pattern. Here is my
preferred Bat pattern trading strategy:
Rules for trading the bullish Bat pattern:
Enter with a limit order to buy at the 88% retracement of the XA leg.
Stop loss to be placed just below the swing low at point X
Exit using a scale out approach, with three target points. Target one will
be set at the swing low of point B, Target two will be set at the swing
high of point C, and Target three will be set at the swing high of point A.
We will often realize a solid risk reward ratio using these entry and exit rules.
Additionally, we should see a relatively high percentage of winning trades
since we are scaling out at important resistance levels along the way.
Bullish Bat Pattern Trading Strategy
Let’s now take a look at a practical example of trading the Bat pattern in
forex, starting with the bullish bat setup. The chart below shows the price
action of the Euro-US Dollar pair on the four hour timeframe.
Firstly we have outlined the bullish Bat structure using the points X, A, B, C,
and D. Notice here that the AB leg retraces the XA leg by just shy of 50%. The
actual retracement seen here at point B is 47%, which is within a narrow
range of our preferred 50% level that we like to see at point B.
Next, notice the price action during the CD leg. It’s a bearish leg and we can
see a swift reversal that occurred upon reaching the 88% retracement of the
XA leg. As price approached the 88% retracement level, we would have
prepared to go long recognizing this bullish Bat pattern in progress. The
circled area shows where the 88% retracement occurs at point D.
That would be the Bat pattern signal for entering a long trade. We would’ve
placed a limit order to buy at this level in expectation of higher prices.
The stop loss would be placed just below the swing low of point X. You can
see that level shown by the red line at the bottom of the chart, which is
denoted, Stoploss. Our exit strategy calls for scaling out of the position in one
third intervals. Our rst target would be the swing low of point B. You can see
that the rst attempt to hit that target fell a bit short, but after a minor move
lower, the second attempt was successful in reaching Target one.
Target two would have been set at the swing high of point C. You can see
that the price action continues to move higher and eventually this target
was hit, allowing us to close out the second third of the position. The nal
third of our position would be held for a short period longer, as price action
continued higher to reach the swing high of point A, which would’ve served
as our nal exit trigger.
Trading The Bearish Bat Pattern
Let’s now shift our attention to the bearish Bat version. The trading rules
would be the same as described above for the bullish Bat pattern, but in the
reverse direction. For the purpose of completeness, we will describe the
rules here again in the context of the bearish Bat formation.
Below you can see an illustration that details the bearish Bat pattern, along
with some additional notations referring to the trade management process.
We will use our pattern recognition skills, or a harmonic pattern scanner, to
locate a potential bearish bat formation on the price chart. Once we have
found a structure that quali es, will need to have a plan to execute a short
position. Remember that within the bearish bat pattern as well, we need to
play close attention to the termination points at point B and point D. And to
reiterate, point B should terminate at either the 38% or 50% Fibonacci
retracement as it relates to the XA leg. And D point should end at the 88%
retracement level of the XA leg.
Rules For Trading The Bearish Bat Pattern:
Enter with a limit order to sell at the 88% retracement of the XA leg.
Stop loss to be placed just above the swing high at point X
Use a multi-target exit strategy. Target one should be set at the swing
high of point B, Target two should be set at the swing low of point C,
and nally the last target, Target three, should be set at the swing low
of point A.
Bearish Bat Pattern Trading Strategy
Let’s now move on and see the strategy in action for a bearish Bat pattern. If
you refer to the chart below you will nd the British Pound to Canadian
Dollar pair with a bearish Bat pattern highlighted.
The XA leg kicks off the structure, and you can see that the price action
within this leg is quite impulsive with strong bearish momentum within the
overall price movement. Then as prices move higher in the AB leg, we can
see that the B point terminated near the 53% retracement of the XA move.
Though this is slightly higher than our preferred 50% level, it is nevertheless
within an acceptable range for the classi cation of the bat pattern.
Then after a minor move lower in the BC leg, the nal CD leg brought prices
higher taking out the swing B high on its way up. At this point we should
have been put on notice that a solid bearish Bat trading opportunity is likely
developing.
We would have placed a limit order to sell at the 88% retracement of the XA
leg, as price was moving higher in the CD leg. You can see the bar wherein
our entry would’ve occurred in the circled area near the top of the chart. Also
notice that prices continue to move higher even after our sell order would
have executed, and the D point terminated all the way to the 97%
retracement of the XA leg, forming a double top.
Since our stop loss would’ve been placed beyond the X point high, we would
not have been in any major jeopardy of it being hit in this particular instance.
It’s also worth noting that the terminal price bar within the CD leg is clearly a
pin bar formation. This further bolsters our outlook for a bearish reversal.
As prices move lower, we can see that our rst target was hit by the long
bearish candlestick that broke below the swing B high. Afterwards, the price
retraced higher a bit, before eventually rolling over to the downside again. As
the selling momentum increased, our second target was triggered at the
swing low of the C point. This was, however, the best we could hope for on
this particular trade because shortly after target two was hit, the price action
reverses swiftly and begins to trade higher. Soon afterwards, our stop loss at
the extreme of the X point was triggered. As such, or entire position was now
closed out, but we would have ended up with an overall pro t on the trade.
Summary
The bearish Bat pattern is one of four major harmonic trading patterns. The
other three include the Gartley pattern, Butter y pattern, and Crab pattern.
The Bat pattern offers the best reward to risk pro le of all these other
harmonic structures. This is due to the deep retracement that is required to
validate the bat formation. Because of this deep retracement, we able to
lean heavily on the major swing point nearby at point X, for the placement of
our stoploss.
What is the Forex Butterfly Pattern?
Harmonic patterns are becoming increasing popular in Forex trading.

Harmonic patterns can be classi ed as Internal Patterns or External Patterns.
Internal patterns include structures such as the Gartley and Bat. External
patterns include structures such as the Butter y and Crab.
In today’s lesson, we will discuss the Butter y extension pattern. After

reading this material, you will be able to recognize the Butter y setup and
know how to trade it pro tably.
The Butter y is a reversal chart pattern that falls within the category of
Harmonic patterns. The pattern represents price consolidation and is often
seen at the end of an extended price move.
Traders can use the Forex Butter y pattern to pinpoint the end of a trending
move and positon for the beginning of a correction or new trend phase. In
Elliott wave terms, you will often see this pattern during the last wave (Wave
5) of the impulse sequence.
Structure of the Butterfly Formation

The Butter y pattern has four price swings, and its appearance on the chart
resembles the letter “M” (in in downtrends ) and “W” (in uptrends). During its
development, it is can sometimes be mistaken for a Double Top or Double
Bottom pattern.
The difference though is that the Butter y does not necessarily appear after
a trend, though it often does. Contrary to this, you do want to see the
Double Top or Bottom appear only after a sustain move for best results.
Notice that the beginning of the pattern is marked with “X.” Following that,
we identify the four price swings of the formation as: XA, AB, BC, and CD.
Fibonacci and the Butterfly Pattern
There are speci c Fibonacci levels that are critical for the proper
identi cation of the Butter y pattern. As you may know, Fibonacci
relationships are a key component to harmonic pattern trading, and so it is
with the Butter y.
In order to con dently identify a real Butter y chart pattern, you will need to
con rm that the price swings of the formation conform to speci c Fibonacci
levels.
Let’s now take a closer look at what these various Fib relationships are within
the Butter y gure:
XA: This is the initial move that forms that pattern. No speci c rules are
required for this move.
AB: The B point is the most critical level for the Butter y pattern and it
should retrace 78.6% of XA leg.
BC: The BC move should take either the 38.2% or 88.6% retracement of the
AB move.
CD: If BC is 38.2% of AB, then CD is likely to reach the 161.8% extension of BC.
On the other hand, if BC is 88.6% of AB, then CD is likely to reach the 261.8%
extension of BC.
AD: Then, the general AD move that consists of AB, BC, and CD should be
either 127.0% or 161.8% of XA.
Now let’s visualize these harmonic relationships.
Take a look at the illustration below:

We want to see a Fibonacci cluster form at the projected D point so that we
can gain con dence in the anticipated reversal zone.
Notice that the Fib levels of the BC and the CD move are shown with two
different colors – green and blue. The green color levels are related to each
other, just as the blue color levels are related to each other.
As we discussed above, if BC reaches 38.2% of AB, CD should go to 161.8% of

BC. If BC reaches 88.6% of AB, then CD should reach 261.8% of BC. This is not
an unbreakable rule but rather a general guideline that you should be aware
of. However, as mentioned earlier the B point retracement of 78.6% of XA is
critical and must be met in order to correctly classify a pattern as a Butter y.
Bullish Butterfly Chart Pattern
In the above illustration, we discussed the bullish butter y pattern. Let’ take
a look at the structure again with the expected price reaction at the D point.
Notice how the bullish Butter y resembles an “M” type structure. The bullish
Butter y is expected to lead to bullish price action at the D point as shown
by the green arrow on the sketch.
Bearish Butterfly Chart Pattern
The bearish Butter y is the mirror image of the bullish Butter y. In this
relationship, the bearish Butter y pattern resembles a “W” type structure.
Let’s look at a sketch of the bearish Butter y:
The bearish Butter y is expected to lead to bearish price action at the D

point as shown by the green arrow on the sketch.
Confirmation of the Harmonic Butterfly Trade
The con rmation of the Butter y chart pattern comes from the
establishment of point “D.”
When the price actions begins to show signs of a reversal at that level, you
would consider entering the trade.
This image shows the typical con rmation of a bullish Butter y chart
pattern. Notice in the sketch, the manner in which price begins to turn once
it reacts to the D level. Obviously, it would work the same way with a bearish
Butter y pattern but in the opposite direction.
Forex Butterfly Strategy
Now let’s describe a system for trading the Butter y pattern. Keep in mind
there are different strategies for trading the Butter y pattern, but we will
discuss a variation based mainly on using the BC projection to nd the D
point. We will walk through each of the three important trade elements –
Entry, Stop Loss, and Take Pro t.
Entry Point
If you are trading a bullish Butter y, you would buy the Forex pair when the
price reacts to the D level after:
CD sets a bottom at 161.8% of BC if BC retraces 38.2% of AB

Or after CD sets a bottom at 261.8% of BC if BC retraces 88.6% of AB
If you are trading a bearish Butter y, you would sell the Forex pair when the
price reacts to the D level after:
CD sets a top at 161.8% of BC if BC retraces 38.2% of AB
Or after CD sets a top at 261.8% of BC if BC retraces 88.6% of AB
Stop Loss
If you are trading a bullish Butter y, you should place a Stop Loss order
below the swing of the newly created D bottom. If you are trading a bearish
Butter y, then place a Stop Loss order above the swing of the newly created
D top.
Make sure you position the Stop at a reasonable distance beyond Point D,
taking current volatility into consideration.
Take Profit
There are numerous ways that you could manage your exit for the Butter y
extension pattern. One effective way is to set the price target at the 161.8%
extension of the CD move.
You may consider closing a portion of your position prior to this level as price
approaches key swing points within the structure. These important levels
include the price swings at points B, C, and A.
These levels could act as potential turning points. As such, you should
carefully watch the way that price interacts at these levels to determine if
you should stay in the trade further or exit.
If a breakout through the A level occurs, then you can be fairly con dent
that the projected target at the 161.8% extension of the CD leg should be
achieved.
The diagram above provides a visual representation of the general
expectations during a bullish butter y trade. The magenta horizontal levels
at points B, C, and A are the potential resistances on the way up to the nal
target. Watching price action at these levels carefully will help you to better
manage your trade.
There is no set progression for the Butter y pattern, so it is important that

you monitor the trade for the best exit opportunities. The rules above are
fully applicable to the bearish version of the Butter y chart pattern but in
the opposite direction.
Bearish Butterfly Pattern Example
The rst example we will study is a bearish Butter y pattern. You will nd the
pattern below:
Above you see the H4 chart of the GBP/USD for August – October 2016. The
red section on the chart highlights the bearish Harmonic pattern.
We can clearly see the four moves that make up the butter y pattern on the
chart – XA, AB, BC, and CD. At the same time, the price swings respond to all
the requirements of our Harmonic Butter y pattern. They are as follows:
XA can be any random bearish move on the chart.

AB retraces 78.6% of XA.
BC retraces 38.2% of AB.
CD extends 161.8% of BC.
After price reaches the 161.8% Fibonacci extension of BC, we see a turning
point and a bearish bounce. This is when you would want to sell the
GBP/USD pair on the assumption that the price will begin a bearish move.
Your Stop Loss order should be placed above the D point as shown on the
image.
The magenta levels on the chart indicate the different support zones that
we are likely to encounter for this Short Butter y trade. The black arrows
point to the price reaction around these levels. Notice how they react, and
turn from support into resistance as price breaks thru these key areas. The
bears are overpowering the bulls at each of these levels. This demonstrates
the strength of the bearish move and the increasing likelihood of our nal
target being reached.
Soon afterwards, the GBP/USD price reaches the 161.8% extension target of
the CD move. Upon reaching this desired target we would close the trade
with a pro t.
Bullish Butterfly Pattern Example
Now let’s dissect a bullish Butter y pattern on the price chart. Have a look at
the image below which displays a bullish butter y formation.
Above you see the 30-minute chart of the USD/JPY Forex pair for December
29 – December 30, 2016. The image shows a bullish Butter y chart pattern
that provides a tradable opportunity. The pattern is highlighed in red on the
chart. We see that the level of the swings respond as follows:
XA is a random bullish move on the chart.

AB retraces 78.6% XA.
BC reaches 88.6% of AB.
CD reaches 161.8% of BC.
After the price reached the 161.8% extension of BC, we see the creation of a
turning point on the chart. This also corresponds to a 127% extension of the
XA leg. As such we have to think that in this case, we may not get any further
extension in the CD leg. Notice the low at the D point is created on high
volatility and price is rejected quickly from the 127% extension area.
Keep in mind, that in trading, we are working with probabilities and not
certainties. As such, we must always be mindful of price action and what the
market is telling us at any given moment and react accordingly. With the
excessive volatility, it would be wise to wait for the market to normalize
before committing to a trade here.
We can enter at the end of the second consecutive bullish candle. This is
shown with the green circle on the chart. You could buy the USD/JPY on the
assumption that we have a valid Butter y pattern and that price is likely to
move higher from here.
Notice the two magenta lines that indicate the top of C and the top of A.
They create a resistance zone where the price shows clear hesitation. The
price consolidates and dips a bit during this time. It would certainly be a
viable option to close out the trade here based on the price action evidence
being presented to us at this time.
Soon after, the price creates a sharp increase, and it eventually reaches the
161.8% of the CD move, which completes the nal price target of this bullish
Butter y setup.
Notice that this time there are only two magenta levels indicating potential
resistance points on the way up. Why are there only two in this case? This is
because our entry signal comes after the price has already increased above
the B bottom and so there is no point in marking this level as resistance. The
price may return to it and test it as a support, but this does not happen in
our example.
Fibonacci Retracement Tool Settings
As you start searching and studying your charts for potential butter y
patterns, you may notice that some of the levels required to con rm the
Butter y pattern are not present in the default Fibonacci indicator within
your platform. The standard Fibonacci Retracement tool consists of the
following levels:
0.00%
23.6%
38.2%
50%
61.8%
100%
161.8%
261.8%
But the Butter y chart pattern requires some additional levels:

78.6%
88.6%
127%
In this case, you need to manually add these speci c levels to your default
Fibonacci drawing tool. If you are using the MetaTrader 4 platform, you can
do this by right-clicking the indicator and choosing “Fibo Properties…” Then
go to “Fibo Levels” and add the respective levels.
Conclusion
The Butter y formation is an extension pattern that is a part of the

Harmonic family of patterns.
The Butter y pattern is a reversal pattern, which can often be found at
the end of a trend move.
Structurally, the formation consists of ve points: X, A, B, C, and D.
The pattern is represented by four important price swings: XA, AB, BC,
and CD.
A valid Butter y pattern should conform to the following guidelines.
XA: could be any random move on the chart.
AB: should be a 78.6% retracement of the XA leg.
BC: should be either a 38.2% or 88.6% retracement of the AB leg.
CD: should reach 161.8% of BC if BC has reached 38.2% of AB, or it
should reach 261.8% of BC if BC has reached 88.6% of AB.
Con rmation of the Butter y setup comes as price begins to turn at
point D.
Forex Butter y Strategy:
Open a trade when you identify the turning point at D.
Place a Stop Loss order beyond the D point, taking into account
current volatility.
Take Pro t target is equal to 161.8% of the CD leg. Although this is
the nal target area, you should watch the price behavior at B, C,
and A to manage an early exit if necessary.
The Fibonacci indicator is an essential tool when trading the Butter y
setup in Forex. You should make sure to add the required levels to the
indicator in order to visualize the pattern correctly. The following levels
should be added to the default Fibonacci drawing tool:
78.6%
88.6%
127%
What is the Harmonic Crab pattern?

The Harmonic Crab pattern or The Crab Pattern™ was discovered in 2001. As
with all harmonic patterns, the Crab pattern is a reversal pattern. Therefore,
we have the bearish Crab pattern that signals a bearish reversal in price and
a bullish Crab pattern that signals a bullish reversal in price.
And as with all harmonic patterns, there is a naming convention for each leg
in the formation.
Starting with the swing high or low, each leg is marked by a letter. There is a
total of ve swing points named as X, A, B, C and D. In some harmonic
patterns, you will only nd four, namely the X, A, B and C.
The Crab pattern is distinct due to its sharp movement in the CD leg. This is
usually a 1.618% Fibonacci retracement of the XA leg, the initial part of the
Crab pattern.
There are clearly outlined rules that one must follow in order to con rm a
Crab pattern. Below are the rules that govern the validity of a Harmonic Crab
pattern.
. After the XA leg in price, the point B is a retracement of between 38.2%

up to 61.8%. This retracement of XA should ideally be less than 61.8%
. The AB leg, is a counter trend move to the previous leg
. Following point B, the next leg, BC can run up to 38.2% – 88.6% Fib ratios
of the AB leg. (C should never exceed point A)
. Following the BC leg, price then reverses again (moving counter
direction to XA). The CD leg is the longest and usually reverses between
161.8% of the XA leg and an extreme 224.0% – 361.8% extension of the BC
leg
Once a Crab pattern validates the above factors, a position can be taken after
the CD leg is formed. Although you will not nd the CD leg to always reverse
near 161.8%, if price action begins to stall and such a reversal begins to occur,
it can be a very high probability trade setup.
It is always best to wait until point D is formed and then take an appropriate
long or short position.
Stops are placed at the low or the high of D, and targets are typically points A
or B in the pattern.
Figure 1 illustrates the Harmonic Crab pattern, showing both the bullish and
bearish Crab reversal patterns.
Figure 1: Bearish and Bullish Harmonic Crab pattern rules
The arrowed lines show the price direction, while the dotted lines show the
Fibonacci levels. As you can see, the most distinctive part of the Crab
formation is the price extension of the CD leg.
Drawing the Harmonic Crab pattern
It can be dif cult to memorize the Fibonacci retracement and extension

values in a Harmonic Crab pattern. Furthermore, it can become tedious
when using the Fibonacci tool to measure each leg while drawing the
Harmonic Crab pattern.
Besides the main rules of the Harmonic Crab pattern, traders can look for the
following tell-tale signs in the market, by analyzing the high and lows and
simply observing the price action.
. BC leg usually forms within the XA leg

. C is a higher low compared to A in a bearish Crab pattern or C is the
lower high compared to A in a bullish Crab pattern
. B forms a lower high compared to X in a bearish Crab pattern, or B
forms a higher low compared to X in a bullish Crab pattern
. D is the extreme, marking a higher high or a lower low, extending
beyond X
Figure 2 shows a bearish Crab pattern that was formed on a 30-minute
GBPJPY chart and depicts how a real-time Crab pattern is drawn (and
traded).
Note that in this example, we made use of multiple Fibonacci tools to

illustrate the retracement and extension levels in the Harmonic Crab
formation.
Figure 2: Bearish Crab pattern
In gure 2, following the XA leg, we notice the lower high formed at B. Using
the b ratios for the Crab pattern, we can validate the following.
The XA retracement levels are checked to validate the retracement

(here, pivot B forms just near 61.8%, barely making it to qualify for the
Crab pattern
At point C, we notice the retracement falling within AB’s 88.2% – 38.2%
zone
Eventually, price surges higher to reach to 161.8% Fibonacci extension of
XA and ts within the 222.4% – 361.8% extension of the CD leg
Following the high, a short position could be taken, with stops at the
high of CD, which marks the price reversal zone (PRZ).
Crab pattern vs. Butterfly pattern

A commonly recurring question is the difference or similarities between the
Crab pattern vs. the Butter y pattern.
The two main aspects that differentiates the Crab pattern from the Butter y
pattern is that in a Butter y harmonic pattern, the swing point D ends at the
127.2% Fibonacci extension of the XA leg. In addition, the Butter y pattern
should retrace to 78.6% of the initial XA leg.
In contrast, when you look to the Crab pattern, the swing point D ends at
the 161.8% extension of the XA leg and terminates the AB leg between 38.2%
and 61.8%
These two primary differences in the Fibonacci ratios between the Crab
pattern and the Butter y pattern make it unique from one another.
The Deep Crab pattern
The Deep Crab pattern on the price chart differs from the Crab pattern on
one main aspect, which is the swing point B.
While in a regular Crab pattern, the B retracement ts within 38.2% – 61.8%%

retracement of XA, with the Deep Crab pattern the swing point B sits at the
88.6% retracement level of XA.
Another quali cation criterion with a deep crap formation is the AB =CD. This
rule suggests that the legs AB and CD must be equal in length.
However, in real world trading, this isn’t always the case, and you need some
exibility in judging the Deep Crab pattern. Looking for a perfect
combination of all the rules will make it very dif cult to trade the Deep Crab
pattern.
Figure 3: The Deep Crab Pattern formation
Figure 3 shows the Deep Crab formation with the bullish and bearish
variations.
Below are the rules to validate the Deep Crab formation.
. After the XA leg in price, the swing point B is a retracement of 88.6% of

the XA leg
. Following swing point B, the next leg, BC can run up to 38.2% – 88.6%
Fib ratios of the AB leg
. The CD leg reverses at 161.8% of the XA leg and an extreme (261.8% –
361.8%) extension of the BC leg
In Figure 4, we have an example of a bearish Deep Crab pattern on a forex

chart. The instrument being used is the EURJPY. Keep in mind, this is not a
perfect textbook scenario. But it is a good real world example that you will
encounter on your charts. Each trader will need to evaluate their own level of
comfort when it comes to how rigid you will be in adhering to the exact rules
for selecting the formations to trade.
Figure 4: Bearish Deep Crab Pattern Example
In Figure 4, you can see that the Deep Crab pattern is validated by the
extension of the CD leg, which falls between 261.8% and 361.8% Fibonacci
extension of the BC leg. However, we notice here that the Deep Crab
pattern did not quite rally exactly to 161.8% of the XA leg. This is where some
subjectivity is required when analyzing whether a harmonic pattern is valid
or not.
If one goes strictly by the rules, this deep crab pattern may have been
disquali ed. However, if one is exible, you can see how price reverses
sharply thereafter from swing point D, despite not quite reversing exactly at
the 161.8% Fibonacci extension level.
The stop loss and target levels for the above Deep Crab pattern example is
similar to the Crab pattern. Long or short positions are taken after the CD leg
is formed. Stops are placed above or below the point D, depending on
whether you are long or short.
Targets are placed at point A and/or point B.
The Deep Crab pattern can be a rare occurrence and therefore looking for
the setup as outlined by the exact rules could mean that traders may have
to lter aggressively to nd the right pattern to trade. This is where each
harmonic trader will use their own discretion in trade selection.
Tools for Locating Harmonic patterns in Forex
Harmonic patterns occur across different time frames and instruments. But
it can get a bit overwhelming when it comes to manually scouting for these
formations in the market.
Thankfully there are trading tools such as the ZUP indicator in MT4 that can
be of great assistance to forex traders interested in trading harmonic
patterns.
There is also a collection of paid and other free harmonic pattern indicators
and harmonic pattern scanner tools that can help traders in scanning the
forex markets for relevant harmonic structures. Many of these are usually
compatible with the Metatrader platform.
The ZUP indicator is one of the most popular harmonic indicators and it is
derived using MT4’s zig-zag indicator and also includes the relevant Fib ratios
within it. The ZUP indicator for MT4 can be downloaded from forums such as
Forexfactory.
The indicator, used to identify harmonic patterns does require some getting
used to. This is because there are quite a few settings involved and you can
even apply the zup indicator to validate some other complex Fibonacci
based methods as well.
Figure 5: ZUP indicator for MT4
Figure 5 shows the ZUP indicator for MT4 and the various settings. As you
can see, there are several settings that allows one to completely customize
this trading indicator. For one, you can use the ZUP indicator to de ne the
Fibonacci ratios so the indicator will search speci cally for these patterns.
You should remember though that no indicator can fully show you the
scope of the market and therefore one should not overly rely on the ZUP
indicator or any indicator for that matter. As with most things in forex
trading, it is important to learn the concepts manually and always have a
keen eye on the price action prevailing in the market.
A good manual exercise is to use the default zig-zag indicator in the

metatrader platform. This indicator can plot pivot highs and lows. Traders can
then measure each of the swing points using the Fibonacci tool and judge
whether a Crab or a Deep Crab or any other harmonic patterns are forming.
You can use the simple method outlined earlier on how to observe the price
patterns and then investigate in more detail when you nd a harmonic
pattern that is of interest.
Still, for those who prefer some automation for harmonic pattern
recognition, using the ZUP indicator or other related harmonic trading tool
should suf ce and provide some time savings.
In addition, there are many communities, forums and websites that are
dedicated to teaching how to trade harmonic patterns. So, there is no lack of
available resources if you have more questions or would like to gain a deeper
understanding of harmonic patterns.
What makes harmonic patterns trading so unique is that there is a precise

method to the process. The objectivity required to validate the patterns
makes it easy for traders to follow the rules and trade accordingly. This
objectivity has also helped in the development of many tools that can
automatically identify harmonic patterns in the market.
Another bene t of trading harmonic patterns is the relatively tight stop loss
and higher reward to risk ratio you can get when these setups are traded
correctly. As we have seen in the above cited examples of the Crab and the
Deep Crab patterns, the stop loss is usually very small relative to the
potential rewards that these patterns can generate.
There are other classical chart patterns in technical analysis including the
head and shoulders pattern, or the double top and double bottom patterns
to name a few. These classical patterns, however, involve a lot more
subjectivity compared with harmonic patterns. This is likely what makes
harmonic patterns so popular for analyzing the markets versus other types
of pattern analysis.
There is no denying the fact that using harmonic trading requires a bit of
practice. It is not as simple as the bullish and bearish signals given by a
moving average or other price based technical indicator. But for those that
have the desire and patience to learn and apply the harmonic trading
technique, they can rest assured in knowing that with the proper
foundation and practice, there are few other trading methods that would
provide a better edge in the market.
Harmonic Shark Pattern
The Shark pattern is a relatively newer discovery within the harmonic trading
arena. It has a very distinct appearance, and speci c Fibonacci relationships
that compose the overall structure. In this article, we will be discussing all
aspects of the Shark trading pattern.
The Shark pattern is a chart formation that is classi ed within the harmonic
family of patterns. It was introduced to the trading community by Scott
Carney, who has done extensive research into Fibonacci-based harmonic
patterns including the Bat, Gartley, and Crab patterns.
As with other harmonic patterns, the Shark pattern exhibits a very speci c
set of Fibonacci relationships within its structure. As for the labeling
convention for the Shark pattern, it differs a bit from the traditional labeling
convention seen within most harmonic patterns. More speci cally, the ve
points within the Shark pattern are labeled as 0, X, A, B, and C. This is in
contrast to many other traditional harmonic patterns that are generally
labeled as X, A, B, C, and D.
The main take away from this is that the terminal point within the Shark
pattern should be recognized at the end of the BC leg, rather than the end
of the CD leg as is common with most other harmonic structures. Many
traders often confuse the Shark pattern with the Cypher pattern. While both
of these patterns are harmonic formations, and have certain similarities
between them, there are some distinct differences between the two that
we will be reviewing a bit later on.
Upon drawing the harmonic Shark pattern, you will notice a few important
features. As far as the general appearance, many traditional technical analysts
may recognize the pattern as a double top formation upon the pattern
completing the B point within its structure, in the context of an up trending
market phase.
Similarly the Shark pattern appears as a double bottom formation upon the
pattern completing the B point within its structure, in the context of a down
trending market phase. This is a fairly general description of the harmonic
Shark pattern. We will be looking at the very speci c Fibonacci proportions
within the structure next. Although it is not required, a Shark pattern
indicator will help in outlining the structure.
Below you can see an illustration of the bullish variety of the harmonic Shark
pattern.
As we can see, the Shark pattern is a ve point formation with four primary
legs. The formation starts at point 0 and ends at point C. Below is a detailed
description of each swing within the bullish Shark pattern.
OX price leg – This is the rst leg within the structure. Price travels higher
from point 0 to point X, and this price move appears to be impulsive in
nature, meaning that it has characteristics of a trending price move.
XA price leg – This is the second leg within the structure. After point X
reaches its peak, the XA leg retraces a portion of the initial upside price
move. While there is no speci c retracement level for the XA price leg it
must be less than a 100% retracement of the initial price move.
AB price leg – The AB price leg is the third leg within the structure. After
point A has completed price begins to move higher within the AB leg.
Eventually this price move extends beyond the swing high seen at point X.
Ultimately, the AB leg will be a 113% to 161% extension of its prior XA swing.
The BC price leg – This is the nal leg within the structure. Starting from
point B, the price action begins to move lower in an impulsive type of move.
The price should travel approximately 161% to 224% the length of the XA leg.
Additionally the terminal point within this pattern occurs at point C, which
will fall between the 88.6 and 113% retracement of the initial 0X price swing.
At this point, the structure is considered to be completed, and a bullish price
move should ensue from this terminal C point.
The Shark pattern can be seen as a type of exhaustion pattern. Within the
context of a bullish Shark pattern, price makes a move to the to the upside
which later leads to a sharp price decline that ultimately gives back most if
not all the gains seen within the structure. And just when traders are
convinced that a new downtrend is in place, a reversal is set to take place at
point C which will again lead to a bullish impulse leg.
In our example here we have discussed the bullish variety of the Shark
pattern, but it’s important to note that the Shark pattern can occur as a
bearish variety as well. In this case, the pattern would be inverted.
Bullish Shark Pattern
Let’s quickly recap the primary b ratios for the Shark pattern, and consider
some trade management rules for the bullish variety of the pattern.
OX price leg – This is the initial bullish impulsive price move.
XA price leg – This leg retraces a portion of the initial OX leg
AB price leg – This leg extends beyond the swing high at point X. Point B
should terminate within the range of 113 to 161% of the XA leg.
BC price leg – As price moves lower, point C should terminate at a level that
corresponds to 161% to 224% projection of the XA leg. Additionally, point C
should retrace to 88% to 113% of the OX leg.
Now, there are several different ways that harmonic traders will trade the
bullish shark pattern. As such, there is no universal method for trading this
pattern. Below are some of the more traditional trade management rules for
the bullish Shark pattern.
Enter a limit order to buy between the 88% and 113% retracement level of
the OX leg.
Place a stop loss at the 127% extension of the OX leg.
Utilize a dual target scale out exit approach, with the initial target set just
below point A of the pattern. The second target will be set just below point B
of the pattern.
If you refer to the illustration of the bullish Shark pattern above once again,
you can see where these levels would trigger within the pattern structure.
Bearish Shark Pattern
Let’s now see what the bearish Shark pattern appears like.
Below you can see an illustration of the bearish variety of the Shark pattern
along with the key Fibonacci relationships within the structure.
OX price leg – This is the initial bearish impulsive price move.
XA price leg – This leg retraces a portion of the initial OX leg.
AB price leg – This leg extends beyond the swing low at point X. Point B
should terminate within the range of 113 to 161% of the XA leg.
BC price leg – As price moves higher, Point C should terminate at a level that
corresponds to 161% to 224% projection of the XA leg. Moreover, point C
should retrace to 88% to 113% of the OX leg.
Now let’s discuss the main Fibonacci relationships and trade management
rules as it pertains to the bearish variety of the Shark pattern.
Below you will nd some traditional trade management rules for the bearish
Shark pattern.
Enter a limit order to sell between 88% and 113% retracement level of the OX
leg.
Utilize a dual target scale out exit approach, with the initial target set just
above point A of the pattern. The second target will be set just above point B
of the pattern.
If you refer to the illustration of the bearish Shark pattern again, you can get
a sense for where these levels would occur within the Shark pattern
formation
Shark pattern vs Cypher
The Shark pattern and Cypher pattern appear very similar in structure,
however, there are some distinct differences between the two. It’s
important to know what these differences are so that you are executing at
the highest probability levels within each respective formation.
Below you can see the bullish Shark pattern shown at the top, while the
bullish Cypher pattern is shown below it.
Firstly, the labeling convention for the Shark pattern is OXABC, while the
labeling convention for the Cypher pattern is XABCD.
In addition, notice that within the Cypher pattern, the second leg within the
structure has a Fibonacci retracement requirement of 38 to 61% of its prior
leg. Within the Shark pattern there is no speci c Fibonacci retracement
requirement for the second leg.
Another important distinction between the two relates to the extension

that occurs in the third leg. Within the Shark structure, the extension should
fall within the 113 to 161% range. Within the Cypher pattern that third leg
extension should fall within the 127% to 141% range.
And nally, the terminal point of the Shark pattern will occur between the 88
and 113% of the initial OX leg, while in a Cypher pattern the terminal point
should occur at the 78% retracement of the move from point X to point C.
Shark Pattern Trading Strategy
Let’s now build a complete trading strategy based on the Shark pattern.
Below you will nd the rules for entering into and managing a long position
upon identifying the bullish Shark pattern on your price chart.
Enter a limit order to buy as price approaches the swing low at point O.
We will use a two-tier target with the initial target set just below point A
of the pattern. The second target will be set just below point B of the
pattern.
And these are the rules for entering into and managing a short position
upon identifying the bearish Shark pattern on your price chart.
Enter a limit order to sell as price approaches the swing high at point 0.
We will use a two-tier target with the initial target set just above point A
of the pattern. The second target will be set just above point B of the
pattern.
Bullish Shark Pattern Setup
Let’s now look at a real example of how to trade the Shark pattern as shown
on a price chart. For this example, we will be referring to the one hour chart
of Apple stock.
As you can see from the outlined area labeled O,X, A, B and C, that the price
action formed a bullish Shark pattern. Notice how the XA leg retraces a
portion of the initial OX leg. And then, the AB leg moves higher and takes
out the high at point X and eventually settles at the 1.14 extension of the XA
leg. Keep in mind that the ideal Fibonacci extension for the AB swing is
between 113 and 161%. In this case that extension terminated at the 114%,
which is within the expected range for a Shark pattern.
After the price puts in a peak at point B, we can see an impulsive price move
to the downside which eventually retraces the entire portion of the price
move made from point O the point B. Based on all of these characteristics
we can be con dent in labeling this entire structure as a bullish Shark
pattern.
Now that we have identi ed this structure as a bullish Shark pattern, we can
refer back to our rules for trading the pattern. We know that our entry calls
for placing a buy limit order as price approaches the point O swing low. You
can see this Shark pattern entry signal marked on the price chart as
represented by the downward pointing blue arrow.
Upon execution of the buy limit order, we would immediately place a stop
loss on the trade. The stop loss should be placed at the 127% extension level
of the OX price leg. You can see that level marked on the price chart by the
green horizontal line below the buy entry.
We will also enter our two targets in case the trade moves in our intended
direction. The initial target is set at a level that corresponds to the swing A
low seen within the Shark pattern. Additionally, our second target will be set
just below the point B high within the Shark pattern. Both of these levels are
marked on the price chart for your reference.
As we can see, immediately following the buy entry, the price moved a bit
lower, however, it quickly reversed course and started to trade higher before
it could trigger our stop loss order. Ultimately the price reached both of our
pre-set targets resulting in a pro table trade on this position.
Bearish Shark Pattern Setup
Let’s now look at an actual chart example of the bearish Shark pattern in
Forex. Below you will nd the price chart for the Canadian Dollar to Japanese
Yen currency pair based on the eight hour timeframe.
Starting from the swing high at point O, we can see that the price moved
lower in a fairly impulsive manner and ended at the swing low marked X.
Then the prices retraced a portion of this move within the XA leg. More
speci cally, that retracement represented about 67% of the prior OX price
move. Keep in mind there is no speci c Fibonacci requirement for this
particular leg, except that it does not retrace beyond 100% of the initial leg.
Moving on from here the prices traded lower in the AB leg. Ultimately, it was
able to breach the swing low at point X, and then settled at the swing low
which represented a 1.18 extension of the XA leg. This falls within our
preferred range of 1.13 to 1.61 extension of the XA leg.
From the swing low at point B prices started to move higher within the nal
leg of the Shark pattern, the BC leg. Notice how the BC leg settles just a hair
above the 113% extension level. This is a bit deeper than the ideal extension
range of 88% to 113%. In any case, this would be a judgment call that the
harmonic trader will need to make for themselves, based on all the other
conditions within the entire structure. It’s important to understand that
sometimes in the real world trading environment, we will need to address
these types of gray areas that appear close to ideal but not necessarily ideal.
With all of these Fibonacci relationships evident within this structure, we

would be safe to label it as a bearish Shark pattern. The entry signal would
occur as prices move higher to test the swing high at point O. You can see
where that sell entry order would have been placed within this particular
trade set up.
After our sell entry order was executed we would turn our focus to the stop
loss and target placements. The stoploss order would be placed at the 127%
extension as shown above the sell entry. The rst target would be set near
the swing high at point A as shown on the chart. The second target would
be set just above the swing low at point B.
Immediately following the sell entry signal, prices move higher however it
turned out to be a temporary continuation to the upside. Eventually the
upside momentum started to wane, and the price began to move lower
before it could trigger our stoploss order.
Soon after, the price was able to hit our initial target, Target 1, as shown on
the chart. From there the price began to retrace to the upside. Our
expectation from here is that prices move lower towards the swing B low,
which also serves as our second target point.
Summary
The harmonic Shark formation is a lesser-known pattern compared to some

of the more widely traded structures within this category such as the Bat
pattern, the Gartley pattern, Butter y pattern and the AB=CD pattern.
Nevertheless, it is one that is worth trading under the right conditions.
Those traders that are interested in trading the Shark pattern or other
related harmonic patterns should consider the handful of harmonic
indicators and software programs in the market that makes the
identi cation of these patterns easier and more reliable. Although some of
these products do come at a cost, they will help save a lot of time in the
scanning process.
Cypher Harmonic Pattern
The Cypher pattern is one of the lesser-known harmonic trading formations.

But it is, nevertheless, a powerful trading pattern that you should learn and
add to your trading toolkit. Here we will dissect the cypher harmonic pattern
in detail, and provide some best practices for trading it in the nancial
markets.
The Cypher pattern is a reversal formation within the harmonic class of

patterns. It occurs across various nancial markets including forex, futures,
stocks, and cryptos. Having said that, it is a less commonly seen structure
compared to some other harmonic patterns such as the Gartley, Bat, and
Butter y patterns.
The cypher pattern consists of four separate price legs, with certain clearly
de ned Fibonacci relationships. We will be discussing each of the important
Fibonacci ratios within the cypher pattern as we move deeper into this
lesson.
The cypher formation often occurs within a trending phase of the market
and appears as a terminal move. That is to say that, upon completion of the
formation, there should be a reversal in the market.
So within the context of an uptrend, the cypher pattern makes higher highs
and higher lows during its formation. And conversely, within the context of a
downtrend the cypher pattern makes lower lows and lower highs during its
progression.
Another interesting characteristic of the cypher pattern is that the rst three
legs within the formation resemble a zigzag or lightning bolt appearance.
Below you can see an example of the cypher pattern. In this particular case,
the structure is considered a bullish variety of the pattern.
Notice above, we can see that the pattern is a ve-point structure, denoted
as XABCD. As such, there are a total of four individual legs that make up the
pattern. The rst leg is the XA leg, the second leg is the AB leg, the third leg
is the BC leg, and the nal leg is the CD leg. Can you see how the A point
and the C point within the bullish cypher structure are making higher highs,
and similarly, how the B point is making a higher low? In addition to that, if
you take a moment to study the XABC points within the structure, you will
be able to recognize that it resembles a zigzag or lightning bolt type of look.
Cypher Pattern Rules
Lt’s now discuss some of the more intricate rules for correctly classifying a
valid cypher pattern. The initial leg of the pattern is called the XA leg, and is
impulsive in nature. The second leg of the pattern is called the AB leg which
retraces a portion of the XA leg. The second leg of the pattern is corrective in
nature. The third leg of the pattern is called the BC leg, and extends beyond
the extreme of point A within the structure. Finally the CD leg retraces a
large portion of the entire move made between point X and C.
Let's now de ne more precisely the Fibonacci relationships within these

different price legs.
The AB leg must retrace the XA leg by at least 38.2%, and it should not
exceed 61.8%.
The C point within the structure should be a minimum 127% projection of

the XA leg, measured from point B. At the same time, C point should not
extend beyond the 141.4% level.
Point D should terminate at or near the 78.6% Fibonacci retracement level of

the price move as measured from the start at point X to point C.
Of these rules, the rst and last are the most important for the Cypher
pattern.
There are two primary Fibonacci tools that will be needed to make these
measurements. The rst is the Fibonacci retracement tool, and the second is
the Fibonacci projection tool. Both of which are available within most
charting platforms. Additionally, there are harmonic patterns indicators and
software programs that can automatically recognize and label the cypher
harmonic pattern on the price chart.
A relevant question that often arises when discussing the various points
within the cypher pattern, or any other harmonic pattern for that matter, is
the following - should you measure the points using the shadows within the
candlestick, or should you only use the closing prices within the candlestick?
The answer to this question is that - it depends. That is to say that if the wick
within the candlestick appears inordinately large, then I typically opt to use
the candle close for measuring the speci c point. On the other hand, if the
wick within the candlestick is of a relatively normal size, then I will opt to use
the wick in the measuring process.
Bullish Cypher Pattern
Let's now take a closer look at the characteristics of the bullish variety of
Cypher pattern by referring to the image below.
The initial leg, the XA leg, rallies higher from the starting point at X.
The AB leg moves lower to retrace the XA leg. This retracement should bring
prices to between the 38.2 to 61.8 percent level of the XA leg.
The BC leg moves higher and takes out the swing high at point A, and
terminating between the 127.2 and 141.4 projection of the initial XA leg.
The CD leg moves lower and terminates near the 78.6% retracement level of
the price move from point X to point C.
Upon the price reaching the 78.6% retracement level at point D, the bullish
Cypher pattern is considered complete, and a price rise is expected.
Bearish Cypher Pattern
And now for the characteristics of the bearish variety of Cypher pattern, let's
turn our attention to the illustration below.
The initial leg, the XA leg, declines from the starting point at X.
The AB leg moves higher to retrace the XA leg. This retracement should
bring prices to between the 38.2 to 61.8 percent level of the XA leg.
The BC leg moves lower and takes out the swing low at point A, and
terminates between the 127.2 and 141.4 projection of the initial XA leg.
The CD leg moves higher and terminates near the 78.6% retracement level
of the price move from point X to point C.
Upon the price reaching the 78.6% retracement level at point D, the bearish
Cypher pattern is considered complete, and a price decline is expected.
Cypher Chart Pattern vs Shark Chart Pattern
Some traders that utilize harmonic patterns in the market get confused
between the cypher pattern, which we been discussing in this article, and
the shark pattern, which is another similar harmonic pattern. We will try to
defuse some points of confusion between these two related structures.
Below you can see a side-by-side comparison of the cypher pattern and the
shark pattern.
Though there are similarities between these two patterns there are a few
key differences that traders should keep in mind.
Firstly, the cypher pattern is denoted as XABCD, while this shark pattern is
denoted as 0XABC.
The second leg within the cypher pattern must retrace within a speci c
Fibonacci range of the initial leg. There is no such requirement for the shark
pattern.
The second swing high within the cypher pattern should terminate within
the 127 to 141% level of the XA leg. For a shark pattern however, this
termination range is quite a bit wider, speci cally between the 113 and 161.8%
level.
The nal leg within the cypher pattern will terminate near the 78.6%
retracement of the prior move measured from point X to point C. The shark
pattern on the other hand will terminate between the 88 and 113% of the
price move as measured from point 0 to point B.
As you can see that visually the cypher pattern and shark pattern have many
similarities. But, from the conventional labeling perspective, and the
Fibonacci ratio requirements, they are quite a bit different.
Cypher Trading Strategy

We’ll now move on to building a strategy based on the cypher pattern. Once
you've gone through the process of scanning the market for a potential
structure that resembles the cypher pattern, you'll want to validate the
most important Fibonacci relationships within the structure before
proceeding further.
And again just to recap the three primary conditions for the cypher pattern
are listed below:
The AB leg must retrace the XA leg by at least 38.2%, and it should not
exceed 61.8%.
The C point within the structure should be a minimum 127% of the XA leg,
measured from point B. At the same time, the C point should not extend
beyond the 141.4% level.
Point D should terminate at or near the 78.6% Fibonacci retracement level of

the price move as measured from the start at point X to point C.
Once we’ve validated the cypher trading pattern, we can prepare for a
potential trade near its completion point.
Here are the rules for a long position within the bullish cypher trading
pattern.
Enter a limit order to buy at the 78.6% retracement level of the XC leg.
This is known as the D point.
Place a stop loss order below the X point.
We will use a two tiered take pro t target strategy. The initial target will
be set just below of the A point swing high, and the second and nal
target will be set just below of the C point swing high.
Here are the rules for a short position within the bearish cypher trading
pattern.
Enter a limit order to sell at the 78.6% retracement level of the XC leg.
This is known as the D point.
Place a stop loss order above the X point.
We will use a two tiered take pro t target strategy. The initial target will
be set just above of the A point swing low, and the second and nal
target will be set just above of the C point swing low.
Bullish Cypher Trade Example

We’ll now go through an actual trade example of a bullish Cypher pattern in
the Forex market. For this example, we will be referring to the 240 minute
chart of the Australian dollar to US dollar currency pair.
On the chart above, you can see the cypher pattern outlined within the light
blue shaded area. Notice the sharp move higher starting from the low at
point X and ending at point A, which completes the initial XA leg of this
pattern. Next there is a price retracement of the XA leg. This occurs during
the AB leg and point B terminates at the 44% retracement level. As such, the
AB retracement is within the preferred Fibonacci range for the cypher
pattern.
After the completion of point B, prices began to move higher once again
within the BC leg. Notice how during the progress of this leg, the price
breaks above the swing A high point. This is a requirement of the cypher
pattern. After the BC leg completes, prices began to move lower in the nal
leg of the move, known as the CD leg.
We know that one of the most important Fibonacci relationships within the
cypher pattern is for point D to terminate at or near the 78% retracement of
the price move measured from the start of X to the end of C. In fact, based
on our cypher trading rules, we would initiate a long position at the 78%
retracement level. You can see that entry level labelled on the price chart.
As soon as our buy entry order was executed, we would shift our focus to the
placement of the stoploss. The stoploss would be placed just below the
swing low of point X. This level is marked on the price chart with the black
dashed line below the entry point. After making a slightly lower price move
following the entry point, the price began to rise quickly. And fortunately on
this particular trade, we were in no real jeopardy of having our stoploss
triggered.
This cypher strategy calls for a two-tiered take pro t level. The rst target,
denoted on the price chart as target 1 would be set at the swing high of
point A within the cypher pattern. And the second target denoted on the
price chart is target 2, would be set at the swing high of point C within the
cypher pattern.
Both of which are clearly shown with the green dashed lines above the entry
point. Target 1 was reached fairly easily, followed by target 2 which was also
triggered. And as a result, we would have realized a pro t on this trade.
Bearish Cypher Trade Example
Let's now illustrate the bearish variety of the Cypher pattern. Below you will
see the price chart for the Euro to Canadian dollar currency cross pair based
on the daily timeframe.
The bearish Cypher forex pattern has been outlined and shown within the
light blue shaded area. Starting from point X, the price of the EURCAD
begins to decline sharply. The selling pressure continues until it reaches the
swing low at point A. This entire move is denoted as the XA leg.
From the swing low at point A, the price begins to retrace higher. Ultimately,
the AB leg retraces the XA leg by 62%. As such, it is just slightly outside the
ideal maximum retracement level of 61.8%. But nevertheless, it is close
enough to consider it a viable cypher pattern.
Once point B completes, prices resume the downward trajectory, taking out
the swing low at point A. Once this BC leg ends, the nal leg within the
bearish cypher pattern, the CD leg, begins to move higher, as it retraces the
entire move down starting from the swing high at point X to the swing low
at point C. Our sell entry would occur upon the CD leg making a 78%
retracement of this aforementioned X to C price move.
If you refer to the price chart, you can see where that sell entry signal would
have triggered. You will also notice that following the sell entry, the prices did
continue to move slightly higher, before rejecting back down, and forming a
shooting star candlestick. This further bolsters our level of con dence for a
potential short trade opportunity.
The stop loss would be placed above the swing high of the X point as is
illustrated by the black dashed line above the entry. And nally, you can see
the two target levels marked on the price chart, which correspond to the
swing low of point A, and the swing low of point C. Soon after our sell entry
order was triggered, prices began to move lower quite sharply, ultimately
triggering both of our target levels and resulting in a pro table trade.
Summary
The cypher pattern is a more advanced harmonic structure, and one that
some traders are not entirely familiar with. The pattern has a high probability
of success and offers a solid risk to reward pro le when traded correctly. As
with most other harmonic patterns, it's important to be fairly stringent when
it comes to validating the pattern. Although we want to leave some leeway
with regards to the ideal Fibonacci ratios within the pattern, we do not want
to be too lenient in its validation.
The reason being is that those cypher structures that are closest to the ideal
b ratios, will often have a better probability of success than those with
weaker b relationships. Another point of interest that is worth mentioning
is that cypher pattern trading will perform better when traded on higher
time frames such as the four hour and above.
What is the AB=CD Pattern

If you have studied harmonic patterns, then you should be familiar with the
more popular types of patterns within the harmonic trader’s collection
including Gartley, Bat, Butter y, Crab, and Cypher patterns. But there is also a
slightly less known, but equally effective Harmonic pattern called the ABCD
pattern. So in today’s lesson we will discuss the AB=CD pattern in depth and
show you how to best use it within your personal trading program.
The ABCD pattern is part of the well-known harmonic group of patterns.

Some traders refer to the ABCD pattern as AB=CD, so for the purposes of this
discussion, we use the terms interchangeably.
The ABCD is considered the simplest harmonic pattern. One of the reasons
for this is that it has signi cantly less requirements than most of the other
harmonic setups. In addition the ABCD formation is much easier to
recognize on the price chart. Let’s take a look now at what the AB=CD
pattern looks like.
The price action behavior of the ABCD pattern starts with price moving in
new direction (A) which later creates an important swing level (B), then
retraces a portion of the A leg (C), and nally resumes to take out the
important swing created at B, and continues until it reaches a distance
equivalent to AB (D). And so when the CD leg reaches an equivalent
distance to the AB leg, we expect a reversal of the CD price move. At the
same time, BC and CD should respond to speci c Fibonacci levels.
When the AB=CD pattern is con rmed, traders will look to set entry points
on the chart right at the beginning of the emerging reversal after the CD
move. The idea is to be in the market early with a trading position just after
the reversal of the CD move.
There are two types of ABCD patterns – bullish AB=CD and bearish AB=CD
Bullish AB=CD
The Bullish ABCD pattern starts with a price decrease (AB), followed by a
reversal and an increase (BC). The BC move then gets reversed into a new
bearish move (CD), which goes below the bottom created at point B. This is
all shown on the sketch below:
This is a standard bullish AB=CD pattern. After the price completes the CD
price move, we expect a reversal and a price increase. This is shown with the
blue arrow on the chart.
Bearish AB=CD
The Bearish AB=CD chart pattern is absolutely the same as the bullish
AB=CD, but everything is upside down. The pattern begins with a bullish AB
line, which gets reversed by a new bearish move (BC). The BC move then
gets reversed by a new bullish move (CD), which goes above the top at point
B.
When you get these characteristics on the graph, you can expect the price
to reverse again creating a new bearish run.
The bearish potential of the pattern is shown with the blue arrow on the
sketch above.
Take note that there are three price moves prior to the con rmed AB=CD
pattern, the AB leg, the BC leg and the CD leg. And only when the CD leg
reaches a distance equal to the AB leg, are we looking to initiate a trade.
As you see, the bullish and the bearish ABCD patterns are a mirror image of
each other. Therefore, the same trading rules are applied to each of them,
but in the opposite direction.
Fibonacci Ratios in the AB=CD Pattern
The AB=CD chart pattern needs to conform to speci c Fibonacci ratios.

Below you will nd a list of the Fibonacci levels, which are associated with
the AB=CD trading pattern.
There are two Fibonacci rules associated with the AB=CD gure:
BC is the 61.8% Fibonacci Retracement of AB.

CD is the 127.2% Fibonacci Extension of BC.
You should always con rm the Fibonacci levels when trading the ABCD
pattern. There are several free AB=CD Fibonacci indicators available for
Metatrader to help you in con rming the pattern requirements as well.
Let me now show you how the Fib ratios are incorporated into the ABCD
pattern:
As you see on the image above, BC should be 61.8% of AB and CD should be
the 127.2% extension of BC. At the same time, the AB and CD price moves
should be of equal distance and take approximately the same time to
develop.
In other words, if you see the price action creating an AB=CD pattern and at
the same time the swings are conforming to the speci c Fibonacci Ratios,
then you can safely assume that you have a very strong, high probability
signal on the chart.
AB=CD Trading System
It is a good idea for the novice Harmonic trader to start with the ABCD setup
before moving to the more advanced Harmonic chart patterns like the Crab,
Bat, or Butter y to name a few.
So then, let’s discuss how you can trade the Harmonic ABCD pattern. Since it
is a unique chart formation, it has its own set of rules for trading. If you learn
how to implement this set of rules, you can expect to trade the ABCD chart
pattern with a positive edge. It’s advised that you examine the following
section outlining the set of rules with a high attention to details.
AB=CD Entry Point

To enter the market on the AB=CD chart pattern you would rst need to
attain con rmation for the pattern’s validity. This means you will need to nd
two parallel price swings which are equal in size (AB=CD). At the same time,
BC should be the 61.8% retracement level of AB and CD should be the 127.2%
extension of BC. Meanwhile AB should also equal CD in terms of time. If you
are able to identify these characteristics on the price chart, then you are
probably looking at a valid AB=CD pattern.
After you con rm the pattern, you should enter the market at the moment
when the price action during the CD move bounces from the 127.2%
extension of the BC move. You should initiate a trade in the direction of the
bounce which is counter to the CD leg.
The illustration above depicts a bearish ABCD pattern. You should look to
short when the CD move reaches the 127.2% Fibonacci extension of move BC
and then bounces downwards.
The same is in force with the bullish ABCD pattern. The difference though is
that everything will be upside down.
AB=CD Stop Loss
When you open a position based on an AB=CD signal you should set a stop
loss order so that you will be protected in case of unexpected price moves
against your trade. The proper location of your stop loss would be just
beyond the price extreme formed at the end of the CD move.
This is the same sketch from above. This time, we have pointed the proper
location of the stop loss order with the thick red line on the image.
As we discussed earlier, the AB=CD pattern gives us the opportunity to trade

a price reversal right from its beginning. In other words, we open the trade
with the emerging of the new trend. This means that our entry point and
our stop loss order are very close to each other. In this manner, the ABCD
Forex strategy provides a very attractive win-loss ratio.
AB=CD Take Profit
The minimum target which you should pursue with your ABCD trading
system is a price move which is equals to the CD leg in size. In this manner,
the place where the CD move started emerging is your target. Have a look at
the example below:
The price move, which is expected to appear after CD, should reach the 100%
Fibonacci Retracement of CD. In other words, the price action which comes
after CD should equal CD in size as shown on the sketch above. However,
this is the minimum potential of the formation. In other words, the price
could extend its move further and it would be to our advantage if we were
to keep a portion of the trade open in order to catch a bigger move.
Therefore, after the price completes the minimum target, I typically close
50% of the position size and keep 50% open in the trade to try to ride the
continued momentum.
And when doing so, it’s important to keep an eye out for price action clues
using support and resistance levels, trend lines, price channels, chart
patterns, or candle formations. When you nd the weight of evidence
shifting in the opposite direction, you should close your trade with your
realized pro t.
Trading the ABCD Setup
Now that we discussed the ABCD pattern and the associated trading rules,
we will now combine all of these concepts into a complete ABCD trading
strategy.
We perform an AB=CD chart analysis. The next most important step is to

validate the pattern.
This means we must evaluate the BC leg and make certain that it is a 61.8%
retracement of AB, and that CD reaches the 127.2% extension of BC. At the
same time, the AB leg should equal CD leg in terms of size and duration.
If the pattern is bullish we can go long placing a stop loss below the D point.
Then we should stay in the trade at least until the price reaches the level of
point C.
If the pattern is bearish, then we should short the Forex pair putting a stop
loss order above point D. Then we should stay in the trade at least until the
price reaches the level of point C.
Let’s now combine these concepts and bring our attention to AB=CD
example on an actual chart:
You are now looking at the 4-hour chart of the GBP/USD for May – July, 2014.
Our ABCD swing analysis identi es an AB=CD chart pattern on the graph.
The pattern is displayed with the blue lines on the image. The black
horizontal lines and the black arrows correspond to the respective Fibonacci
levels. See that AB is approximately equal to CD. Also, AB takes
approximately the same time to develop as CD. BC is the 61.8% Fibonacci
Retracement of the AB move and CD is the 127.2% extension of BC.
Therefore, we con rm the validity of the ABCD formation on the chart.
As you probably have noticed, we have a bullish ABCD pattern on the chart
here, because the AB and the CD swings point downwards. In this manner,
we expect that this valid ABCD pattern leads to a bullish price move.
The CD move nishes in the area of the 127.2% Fibonacci extension of the BC
move and the price then bounces upwards. Once you have noticed this, it’s
time to execute a long trade. You should place your stop loss order below
the lowest point of the CD swing as shown with the red thick line on the
chart.
After a few tests of the 127.2% Fibonacci extension, GBP/USD price starts
increasing. A couple of weeks afterwards, the Cable price reaches the
minimum target of the pattern. In other words, the price increases to the
level of the C top. Here we would have two viable options – to either close
the trade in full and to collect the realized pro t, or close a portion of the
trade and keep a portion open in order to catch a further price move.
In this particular case if you had decided to stay in the trade for further pro t,
your decision would have been rewarded. On the way up, the price creates
only higher bottoms, and doesn’t test any critical support areas, which
bolsters our long position. Therefore, the best course of action is to hold the
trade further until the price breaks one of its support levels. This happens on
July 4, 2014 when the GBP/USD decreases through the level of its last
bottom, which we have marked with yellow on the chart. This would have
provided an exit signal on this trade.
Notice that the minimum target of this ABCD pattern is only half of the total
price move from this example. This shows why it is so important to try to ride
a winning trade for as long as the market allows.
Let’s now approach another AB=CD Forex pattern:
This time, we have the 4-hour USD/JPY Forex pair on the chart. The Time
frame covered is June – Aug, 2013. The image displays a bullish ABCD pattern.
The blue lines on the image outlines the pattern from point A to point D. The
black horizontal levels on the image and the two black arrows correspond to
the respective Fibonacci levels and the directional shift in price after
interacting with the levels.
Move AB is approximately equal to move CD in terms of size and time to
develop. At the same time, BC retraces 61.8% of the AB move and CD has
reached the 127.2% Fibonacci extension of the BC move. Therefore, we
con rm the validity of the pattern.
Since the gure above represents a bullish ABCD pattern, we would look to
buy the USD/JPY Forex pair after the price bounces from the 127.2%
extension of BC.
Once we realize the price bounce off the 127.2% extension level, we can see
price starts its upward movement. A few weeks after the long signal on the
chart, the price action completes the minimum target of the bullish ABCD
pattern. Again, we would face two viable options at this moment – to close
the trade in full and collect the generated pro t, or keep a portion of the
position open and stay in the trade for a potential price increase.
If you decided to trade the USD/JPY further, you would experience another
price impulse in the bullish direction. However, the results are not as
pro table as in the previous example. Two weeks after the minimum target
is completed, the price action creates a very big bearish candle which breaks
an important support on the chart. We have marked this support with the
yellow horizontal line on the image above. This creates a relatively strong sell
signal on the chart and any long positions at this point become suspect.
Conclusion
The AB=CD pattern is one of the most basic harmonic patterns.
Requirements of the AB=CD formation:

AB should equal CD in terms of size.
AB should equal CD in terms of time to be created.
BC should be the 61.8% retracement of AB.
CD should reach the 127.2% extension of BC.
There are two types of ABCD patterns:
Bearish ABCD – AB is bullish, BC is bearish, CD is bullish. The
potential outcome is bearish.
Bullish ABCD – AB is bearish, BC is bullish, CD is bearish. The
potential outcome is bullish.
A high probability ABCD trading system for a bearish AB=CD pattern is
below: ( the opposite would be true for a bullish AB=CD setup:
Con rm the validity of the pattern with the size of the AB and CD,
as well as with the respective Fibonacci levels.
Sell when after CD reaches the 127.2% Fibonacci extension of BC
and the price action bounces from this level.
Put a stop loss above the D point on the chart.
Stay in the trade for a minimum price move equal to the size of CD.
Keep a portion of your position open for the possibility of a further
price move and utilize simple price action rules for a nal exit
signal.
Harmonic Three Drives Pattern
The three drives pattern is a harmonic formation that helps clue us into the
possibility of a market reversal following a prolonged price trend. We will
study this price pattern from a few different perspectives. You’ll learn the
most important Fibonacci ratios within the pattern, the best times to trade
the 3 drives pattern, and develop a trading strategy around it.
The three drivers pattern is one of several patterns which are classi ed under
the harmonic class of price patterns. The three drives pattern was outlined in
Scott Carney’s book, the Harmonic Trader. The pattern is similar to the
ending diagonal structure which is referenced within the Elliott wave theory.
Essentially, it is an exhaustion pattern that occurs in both uptrends and
downtrends after a prolonged directional price move. It indicates waning
momentum in the direction of the prevailing trend, and calls for a potential
reversal in the market.
The pattern appears as three legs forming swing highs in an uptrend, and as
three legs forming swing lows in a downtrend. These legs are also known as
drives, as the name of the pattern implies. The upshot of this is that the
three drives pattern is trend reversal pattern. Although most trend reversals
do not exhibit the three drives pattern, whenever it is present, it provides a
powerful signal for a trend reversal.
The difference between the pattern as described within the Elliott wave
theory, as an ending diagonal versus the pattern as described within the
context of Harmonic trading, is in the application of Fibonacci ratios within
the pattern. More speci cally, within the Elliott wave theory, the description
of the three drive pattern, labeled as an ending diagonal, does not require a
strict adherence to speci c Fibonacci ratios within the overall structure.
On the other hand, the harmonic trader version of this pattern requires a
strict adherence to speci c Fibonacci ratios within the structure. Said
another way, this pattern under the Elliott wave principle can be identi ed in
a more qualitative manner, whereas, under the harmonic trading rules, this
pattern would need to be identi ed in a more quantitative manner. In this
lesson, we will be focusing on the more quantitative method for identifying
and trading the three drives pattern.
Identifying And Drawing The 3 Drives Pattern
The three drives pattern has a very distinctive look to it. In an uptrend the
pattern consists of a series of three consecutive swing highs. In a downtrend
the pattern consists of a series of three consecutive swing lows. After the
nal swing has completed, the market will often make a sharp reversal. Let’s
take a closer look at how we would go about recognizing the three drive
pattern.
On the illustration below you can see an example of a bullish three drives
pattern.
The rst thing that we want to look for when identifying a three drives
pattern is a strong trend preceding the pattern. So essentially, three drive
patterns will occur at the terminal points of strong price rallies and price
declines. Notice on this price chart, you can see the strong uptrend leading
to the bullish three drives pattern. Next, we will want to measure the
respective drives using our Fibonacci toolset. More speci cally, we will need
to apply the Fibonacci retracement tool, and the Fibonacci extension tool.
The Fibonacci retracement tool will measure the corrective pullbacks within
the structure, and the Fibonacci extension tool will measure the external
impulsive legs within the structure.
Here are the most important Fibonacci ratios and guidelines for the three
drives pattern:
The corrective wave following the initial drive should be a 61.8%

retracement.
You would measure this level using the b retracement tool, by
selecting the high and low points of the rst drive.
The corrective wave following the second drive should also be a 61.8%
retracement.
You would measure this level using the b retracement tool, by
selecting the high and low points of the second drive.
The second drive should be a 127% extension of the prior corrective
wave.
You would measure this level using the b extension tool by selecting
the high and low points of the corrective wave preceding drive 2 within
the structure.
The third drive should be a 127% extension of its prior corrective wave.
You would measure this level using the b extension tool by selecting
the high and low points of the corrective wave preceding drive 3 within
the structure.
As you can see, the three drives pattern under the harmonic trading rules
require a very strict adherence to speci c Fibonacci ratios. This pattern can
be seen across many different trading instruments and time frames. This
includes the equities markets, the futures markets, the Forex market, and
the crypto markets. Although, the pattern does appear at varying time
frequencies, it is most reliable when seen on the eight hour charts and
above. It is especially worthy of attention when it shows up on the daily
chart.
During the progression of the three drives pattern, volume will tend to dry
up in the instrument, and we will often see a divergence between the price
and various momentum oscillators, including the Stochastics, RSI and
MACD. These indicators can help provide additional con rmation for trading
the potential reversal following the termination of the three drives pattern.
Bullish 3 Drives Pattern
We showed an example of a bullish three drives pattern in the previous

section, and described the process of identifying and drawing the pattern on
the price chart. Let’s now take a look at the same pattern again, but this
time, adding in the potential targets that can be expected following pattern
completion.
On the illustration above you will notice the targets marked for the bullish
three drives pattern. Just to recap, the bullish three drives pattern is a
formation wherein there are three legs or drives higher leading to a potential
termination point. Additionally, the corrective legs following the rst and
second drive should be equivalent to a 61.8% retracement. And nally the
second and third drives should be a 127% extension of their previous
corrective leg.
Now, there are many different ways that a trader can manage their exits with
the three drives trading pattern. The traditional method for exiting a position
using this formation is to close the trade at the 61.8% retracement of the
entire structure.
However, my preferred method is to scale out using two targets. The rst
target for the bullish three drives pattern is the swing low seen at the start of
drive three. The second target would be the swing low seen at the start of
drive two. These targets tend to offer the best combination of win rate
coupled with a favorable risk reward ratio.
Bearish 3 Drives Pattern
The bearish three drives pattern is the inverse of the bullish three drives
version. The rules are the same, with the exception that, the bearish three
drives variety is seen within a downtrend.
Let’s take a look at an example of the bearish three drives pattern formation.
On the illustration above, you can see what the bearish variety of the three
drives pattern looks like. Notice how the rst and second corrective legs
within the bearish structure retraces the previous impulsive legs by the 61.8
retracement level. Furthermore, take note of how the second and third
drives within the bearish three drive structure are a 127% Fibonacci
extension of their previous respective corrective legs. This creates an
idealized version of the bearish three drives pattern. At the termination of
the third and nal drive, the market will reverse the prior downtrend.
It’s important to note that in real-time market conditions, we have to allow
for some exibility in these measurements. This is because the markets do
not provide for idealized scenarios, and as such, applying some good old-
fashioned common sense during the evaluation process is a must.
Speci cally, what I mean to say is that if the required b ratios for the three
drives pattern ts all but a few measurements, by a slight amount, and those
measurements that are off slightly do not inherently distort the overall
structure of the pattern, it would make practical sense to continue labeling
the structure as a three drives pattern. Obviously, there is a ne line in the
use of discretion here. While we do not want to be overly rigid in our
assessment, we cannot be too liberal in our labeling rules either.
Now that we have seen what the bearish three drives pattern appears like,
let’s now, take a closer look at the target levels as it relates to this bearish
version.
Referencing the image above, you will again note that we will utilize a two
tiered target following the termination of the three drives pattern. The rst
target, the initial target point, will be the swing high of the third and nal
drive within the pattern. And our second target will be the swing high of the
second drive within the pattern. These levels represent areas of resistance
where upside price action will be challenged. As such they represent logical
levels for taking pro ts.
Trading The Three Drives Pattern

Let’s now create a trading strategy using the three drive pattern. We have
dissected both the bullish and bearish three drives pattern, and have
discussed potential target zones for the pattern. We’ll now add in all the
necessary components to have a fully functional working model that can be
applied to the market. This includes an entry mechanism, a con rmation
lter, and risk containment element in the form of a stoploss.
We have described the Fibonacci ratios that are most important within this
harmonic structure. Once we have recognized a potential three drives
pattern, we will need to go through a repeatable work ow in evaluating the
viability of the trading set up. Firstly, we will want to con rm that an
established trend exists prior to the development of the three drives
pattern. Once we have con rmed this, then we can move on to the next
step.
As a requirement for entering into the three drives set up, we will set up a
lter that helps establish that the current market is trading at overextended
levels. Essentially, we will incorporate the RSI, the Relative Strength Index
and look for a reading of at least 70 or above during the bullish three drive
pattern. This will validate an overbought market condition. Similarly, we will
require an RSI reading of 30 or lower during the bearish three drives pattern,
which will help validate the presence of an oversold market environment.
Once the RSI lter has been con rmed, then we will look to execute our
entry in the nal stages of the third Drive within the pattern. More
speci cally, a limit order entry will be placed just shy of the 127% Fibonacci
extension level. We know that in this pattern both the second drive and the
third Drive will extend to this level before pulling back. As such, our strategy
will call for entering into that nal push just before an imminent reversal. This
will serve as the three drives pattern signal.
When our entry order is executed, will need to immediately place a stop loss
order on our trade. The stoploss level should be placed at the 161% Fibonacci
extension of the last drive within the pattern. This level will typically act as
hidden resistance following the three drives pattern in an uptrend, and will
provide an area of support following the three drives pattern in a downtrend.
As such, we will use that tendency as a means for placing a logical stoploss
around this trade setup.
As for the take pro t levels, we know that we will be using a tiered exit plan.
The rst take pro t point will be the start of drive three, and the second and
nal take pro t point will occur at the start of drive two. And with that, we
now have a complete and fully functional trading strategy for the three
drives pattern. In the following section, we will detail both a bullish three
drives pattern, and a bearish three tries pattern on actual price charts.
Bullish Three Drives Setup – Trade Example
Now that we have a detailed trading plan for executing the three drives set
up, it’s now time to demonstrate what that might look like on the price
chart. Below you will nd the eight hour chart for the Australian Dollar to
New Zealand dollar currency pair.
Let’s go step-by-step in analyzing the bullish three drives pattern in forex

illustrated on this chart. Firstly, as the market was making consecutively
higher swing highs, as can be seen towards the center area of the chart, we
would have been alerted to the possibility of a bullish three drives pattern
emerging.
You can see the three drives pattern indicator outlined. Notice how after the
rst drive, the price retraces just beyond the 61% retracement level, and how
the after the second drive, price retraces at nearly the 61% retracement level.
This can be seen by the two blue horizontal lines running across the price
chart.
Furthermore, notice how the second drive extends a bit beyond our ideal b
extension of 127%, and ultimately creates a swing high at the 138% extension
level. Although this is not ideal, keep in mind that most patterns in the
market will not conform to ideal proportions. But based on the overall
structure here it would be considered a viable bullish three drives pattern.
Now, before we move on to trade execution, we must con rm that there is

an uptrend prior to the formation of the three drives pattern. Obviously we
can see from the price action leading up to the bullish three drives pattern
that there was indeed an uptrend present. With that con rmation in place
now, the next step would be to analyze the RSI oscillator to con rm a
reading of 70 or above at or near the termination of the bullish three drives
pattern. If you refer to the blue dotted vertical line you can see that as the
third drive within the structure was in progress, that the RSI exceeded the
overbought threshold of 70.
Now, it is time to prepare for a short trade entry. As per our rules, a short entry
would be executed using a limit order at a price just below the 127%
extension of the nal drive within the pattern. Note the magni ed area on
the price chart showing where that entry could have occurred. The nal
drive terminated at the 129% b extension, and so our limit order to sell
would have been triggered just below this level.
The stoploss would be placed at the 161% extension level of the nal
corrective leg within the structure. Notice the black dashed line on the price
chart that illustrates where the stoploss would have been placed. As for
closing out of a pro table trade, we will utilize a two-tiered take pro t exit.
The rst target will be placed just above the start of the third drive within
the structure, and the second target will be placed just above the start of
the second drive. Again if you refer to the two blue horizontal lines on the
price chart, you can get a sense of where those exits would have occurred.
You can also see those levels as shown by the two blue arrows denoted as
target one and target two.
Bearish Three Drives Formation – Trade Example
Let’s now take a look at the bearish variety of the three drives set up. Below
you will nd the price chart of Canadian Dollar vs. Swiss Franc based on the
eight hour timeframe.
As we can see here, the price action was making a series of lower swing lows
and lower swing highs. Towards the center of this price chart we should have
been able to recognize an emerging bearish three drives pattern. Once we
were clued into the possibility of this pattern forming, we would pull up the
Fibonacci retracement and extension tools to con rm the b ratios within
the structure.
Notice how after both the rst and second drives within this pattern, price
retraced just shy of the 61% retracement level. The two blue horizontal lines
across the price chart illustrate the 61% retracement levels following the rst
and second drives within the pattern. Next, we will use the Fibonacci
extension tool to measure the price move within the second and third
drives. Notice how the second drive ends at the 128% extension of its prior
corrective leg.
With this backdrop in mind, we can conclude that a bearish three drives
pattern was forming and which t our Fibonacci ratio requirements quite
nicely. The next step would be to con rm that a downtrend was present
prior to the emergence of this bearish three drives pattern. It’s quite clear
from the price action and the accompanying downward pointing red arrow
that the price action was moving lower steadily in a stairstep fashion.
The next step in the process would be to con rm that the Relative Strength
Index, RSI, registers a reading of 30 or below during the downward price
movement within the three drives formation. During the nal leg of the
bearish three drives pattern that the RSI registered a reading of 30, with
satis ed the requirement for a potential long set up opportunity.
Based on our trading plan, we would place a buy limit order just before the
127% Fibonacci extension of the nal drive within the pattern. Referring to
the magni ed area within this price chart, you can see that the nal drive
reached its termination point at the 134% extension level. As such, our buy
limit order would have been triggered and placed us into a long position
within this currency pair.
The stop loss would be set at the 161% b extension as noted by the black
dashed line towards the lower end of the chart. Finally, we would need to
incorporate a two-tiered exit strategy for closing out the trade as the price
moved in our intended direction. You’ll notice the two target levels marked,
and which correspond to the highs at the start of drive two and drive three.
Summary
The three drives a pattern is a lesser known harmonic pattern compared to
the Gartley, Bat, and Butter y formations. But just as with other harmonic
patterns, the three drives and Fibonacci ratios are closely linked. The pattern
offers a solid trading opportunity when traded in the right market context,
and with the right combination of risk reward setting.
Many harmonic traders simply trade any and all three drive patterns seen on
the price chart. However it’s important to recognize that the best three drive
patterns occur after a prolonged market move. These scenarios offer the
highest probability trading opportunities as it relates to both the bullish and
bearish varieties of the three drives pattern. As such, it would be prudent to
focus on this harmonic pattern setup only during such times.

Beginners Guide To Trading Harmonic Patterns

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Beginners Guide To Trading Harmonic Patterns

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Table Of Contents

Harmonic Patterns in Forex 5

Gartley Harmonic Chart Pattern 5

Bat Harmonic Chart Pattern 6

Butterfly Harmonic Chart Pattern 7

Crab Harmonic Chart Pattern 8

Cypher Harmonic Chart Pattern 9

Harmonic Chart Formations Analyzed 10

Trading Strategy Using Harmonic Chart Patterns 11

Stop Loss Order when Trading Harmonic Patterns 11

Take Profit Zones when Trading Harmonic Patterns 12

Adjusting the Stop Loss Order when Trading Harmonic Patterns 13

What is the Gartley Pattern in Forex 15

Rules of the Gartley Pattern 16

Potential of the Forex Gartley Pattern 17

Bullish Gartley Pattern 18

Bearish Gartley Pattern 19

Gartley Trading Strategy 20

Gartley Trade Entry 20

Gartley Stop Loss 20

Gartley Trading Example 22

Bullish Gartley Pattern Example 22

Bearish Gartley Pattern Example 23

What Is The Bat Pattern? 25

Rules For Identifying The Bat Pattern 26

Bullish Bat Pattern 28

Bearish Bat Pattern 29

Bat Pattern vs. Gartley Pattern 30

Trading the Bullish Bat Pattern 31

Bullish Bat Pattern Trading Strategy 32

Trading The Bearish Bat Pattern 33

What is the Forex Butterfly Pattern? 36

Structure of the Butterfly Formation 36

Fibonacci and the Butterfly Pattern 37

Bullish Butterfly Chart Pattern 39

Bearish Butterfly Chart Pattern 40

Confirmation of the Harmonic Butterfly Trade 40

Forex Butterfly Strategy 41

Bearish Butterfly Pattern Example 43

Bullish Butterfly Pattern Example 45

Fibonacci Retracement Tool Settings 46

What is the Harmonic Crab pattern? 47

Drawing the Harmonic Crab pattern 49

Crab pattern vs. Butterfly pattern 50

The Deep Crab pattern 51

Tools for Locating Harmonic patterns in Forex 54

Harmonic Shark Pattern 56

Bullish Shark Pattern 58

Bearish Shark Pattern 60

Shark pattern vs Cypher 61

Shark Pattern Trading Strategy 62

Bullish Shark Pattern Setup 63

Bearish Shark Pattern Setup 64

Cypher Harmonic Pattern 66

Cypher Pattern Rules 68

Bullish Cypher Pattern 69

Cypher Chart Pattern vs Shark Chart Pattern 71

Cypher Trading Strategy 72

Bullish Cypher Trade Example 73

Bearish Cypher Trade Example 75

What is the AB=CD Pattern 76

Fibonacci Ratios in the AB=CD Pattern 79

AB=CD Trading System 80