Harmonic patterns: Gartley, Bat, Butterfly, Crab and Shark

11 Ara 2017

BTCUSD

Dear friends,

As I have promised, I present you my next weekly training article.

Some time ago I started studying harmonic patterns, book by Scott Carney “Harmonic Trading” proved to be very useful.

Having studied it thoroughly, I tried to sum up my knowledge and write the summary in a series of article, starting from the present one.

Let’s start...

For those, who have never read about harmonic patterns, I’ll describe the basic rules:

1. All harmonic patterns are linked to Fibonacci retracement levels
2. Harmonic patterns work in all timeframes
3. The most common pattern is XABCD, where:

• (XA) is a move, where point (X) is the start of the trend and (A) is its top
  (AB) is trend retracement, and (B) marks the retracement extreme
  (BC) is trend extension with the peak at point (C)
  (CD) ending move, opposite line (AB)
  
  

This pattern looks like this:


4. To start working with the pattern, it is necessary to know the coordinates of points (X), (A), (B), (C) in the chart history.

Only having the four coordinates you can identify pattern type and its properties.

5. Pattern points should fulfill the following conditions

Pattern type
Gartley |B of XA 0.618 | C of BA 0.382-0.886 | D of AB 1.272-1.618 | D of XA 0.786|
Bat |B of XA 0.382-0.5 | C of BA 0.382-0.886 | D of AB 1.618-2.618 | D of XA 0.886|
Alternative Bat |B of XA 0.382| C of BA 0.382-0.886 | D of AB 2.0-3.618 | D of XA 1.13|
Butterfly |B of XA 0.786| C of BA 0.382-0.886 | D of AB 1.618-2.214 | D of XA 1.272|
Crab |B of XA 0.382-0.618| C of BA 0.382-0.886 | D of AB 2.24-3.618 | D of XA 1.618|
Deep crab |B of XA 0.886| C of BA 0.382-0.886 | D of AB 2.0-3.618 | D of XA 1.618|
Shark |B of XA 0.382-0.618| C of BA 1.13-1.618| D of AB 1.618-2.214 | D of XA 0.886-1.13|

Fibonacci levels of corresponding moves are indicated in the table

6. Accurate following the set parameters of the pattern. Any deviation sharply reduces the targets likelihood (it is desirable to avoid deviation from the set parameters of more than 0.05)

After you identified the pattern type, it is necessary to find...

1. Potential Reversal Zone (PRZ).

Any pattern has a start and an end point. A perfect Harmonic analysis feature is its quite clear identification of potential pattern end point. As harmonic analysis is reversal patterns, trend end point is called potential reversal zone. This level is identified with Fibonacci levels within the rage, studied by the pattern (see the ranges in the table)

A very important moment is the price move at the level. If the price doesn’t response to PRZ, it signals a high potential of the current move, which makes the whole pattern questionable.

2. Stop Loss Zone (SLZ)

A key risk management moment in trading is the identification of the acceptable level of losses. In harmonic trading this zone is outside the potential reverse zone (PRZ). At this point it becomes clear, that the pattern hasn’t worked out and it is necessary to limit the losses, revise the forecast and correct the mistakes.

3. Profit Protection Zone (PPZ)

The most important trading rule:

"“Never let your profits turn into your losses”

Following the rule, before entering a trade, profit protection zone needs to be identified. That is the point, where you will fix a part your profits to ensure breakeven if the trend reverses and SLZ is reached.

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4. Initial Profit Objective (IPO) .

In any trading strategy it is very important to identify the position coverage point. In harmonic trading initial profit objective is level 38.2% and 61.8% of the pattern highest point. If the price reaches the level but can’t cover it, it is important to fix a part of the profits.

Traders have noticed, that if the market is entered at the reversal point, following all the necessary signals, then level 38.2% of the pattern high is most likely to be reached. That is why, it is the point to break even.

After you entered the market, you should take into account:

1. Angle of Ascent/Descent.

Although, harmonic trading doesn't identify the angle of the price move at the reversal zone. If in the reversal zone the market leaves the trend and, instead of expected momentum, shifts to flat, it is a signal to revise your predictions and your objectives.

2. Time Zone.

As you already know, all harmonic patterns are based on Fibonacci numbers, these rules are relevant not only for price levels but also for time frames.

Ideally, in harmonic pattern time periods for forming left swing XB and the right one BD should coincide, but this ratio is very rare. So, to check the pattern, the frame is selected, where BD equals to 0.382-1.618 of XB.

The same rule can be applied to the trend move after PRZ.

The length of the swing, whose momentum started at point(D),is within the time zone of 0.382-1.618 of BD line.

Now, let’s look at a practical example...

Just before the article was finished, BTCUSD on Bitfinex had formed an ideal harmonic Gartley pattern . So, fortunately, I have not only found a perfect example for you, but also increased my deposit.

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How have I identified, that it is Gartley?

As we see in the chart, to identify the pattern type, we need to build Fibonacci retracement levels at the line XA and reversed retracement levels at BA swing.

We see, that point (B) is exactly at level 0.618 of (XA). It is the first and main feature, identifying the pattern type.

Then, we look at point (C). In Gartley it should be in the range between 0.382 and 0.886 of the arranged levels BA.

In our example, this condition is also fulfilled. Point (C) is at level 0.747.

According to these two conditions we can identify, that this pattern is Gartley, and expect the retracement from point (C) to point (D) into zone 0.786 of XA swing, where point (D) will be in zone, ranging from 1.382 to 2.681 of XB swing (marked with blue arrows).


After the quote has marked point (D) in the chart, thus identifying its PRZ, SLZ, PPZ 1 and PPZ 2 a long trade can be entered.

As it is seen in the chart below, the pattern has worked out almost ideally, having worked out all the breakeven zones and started retracement where it should, reaching the limit of 0.382 of BD swing.

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Moreover, the momentum hasn’t reached the targets of TP1 at point (C) level and TP 2 at point (A) level.



As two points of breakeven have worked out, we have enough means to find the next entry point, considering the reversal signals, and open more buy positions, multiplying the pattern profitability.

I want to note, that not all harmonic patterns have been described in the article. Wait for the continuation. ;)

I wish you good luck and good profits!

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The best regard for me your following.