**Guide to Harmonic Trading and Harmonic Patterns**

Harmonic Trading is a highly sophisticated technical analysis method that aims to forecast major price reversals based on chart patterns recognition and Fibonacci ratio alignments.

__These are the basic Harmonic Ratios__:

I. Primary Ratios

• 0.618 = Primary Ratio | 1.618 = Primary Projection

II. Derived Ratios

• 0.786 | 0.886 | 1.13 | 1.27

III. Complementary Ratios

• 0.382 | 0.50 | 0.707 | 1.41 | 2.0 | 2.24 | 2.618 | 3.14 | 3.618

Based on the above ratios we can distinguish 6 basic harmonic patterns.

(1) ABCD Pattern

(2) Three-Drive Pattern

(3) Gartley 222

(4) Harmonic Bat

(5) Harmonic Crab

(6) Butterfly Pattern

This is an analysis of all six basic Harmonic Patterns:

(1)** The Basic AB=CD Pattern**

The AB=CD pattern is a very important 4-point harmonic formation and it is considered as the basic structure of all other harmonic patterns. The AB=CD can be either bullish or bearish.

•AB and CD form the legs

•BC is the retracement

If AB line equals the CD line, then the point C is indicating the existence of a potential AB=CD pattern, and point D is very crucial as concerns the completion or not of this pattern.

__How to identify the Perfect ABCD Formation__

(1) Find the Fibonacci retracement tool which is available in almost all modern trading platforms

(2) By applying the Fibonacci retracement tool on AB, the BC retracement must reach the 0.618 level

(2) By applying again the Fibonacci retracement tool on BC, the CD should ideally reach the 1.618 level

**The AB=CD Pattern Key Characteristics**

1. AB leg must be equivalent to the CD leg near completion

2. The Point C retracement can vary between 0.382 to 0.886 and that creates alternative AB=CD formations

3. The ideal Point C retracement is 0.618 (as seen in the above chart)

4. The BC projection can vary from 1.13 to 2.618 (according to point C retracement)

5. The ideal BC projection is 1.618 (as seen in the above chart)

(2)** Three-Drive Pattern**

The 3-Drive pattern is similar to the AB=CD pattern, except the fact that it has 3 legs and 2 retracements. AB=CD has 2 legs and 1 retracement. The 3-Drive Pattern is also similar to the Elliott Wave formation, which is one of the basic formations of technical analysis.

__Basic Steps to identify the 3-Drive Pattern__

(1) Point A must be the 0.618 of Drive 1

(2) Point B must be the 0.618 retracement of Drive 2

(3) Drive 2 must be the 1.272 extension of correction A

(4) Drive 3 must be the 1.272 extension of correction B

(5) Ideally, the time required for the price to form Drive-2 equals the time for the formation of Drive-3

(3)** The Gartley 222 Pattern**

The Gartley 222 pattern was discovered by H.M. Gartley on page 222 of his book “Profits in the Stock Market, 1935).

The Gartley 222 incorporates the classic ABCD formation with some extra features. The Gartley pattern is formed by 5 pivot or swing points which can be visualized as:

-‘M’ for bullish patterns

-‘W’ for bearish patterns

**The Gartley 222 Pattern Key Characteristics**

• The Point B must be the exact 61.8% retracement of XA

• The projection of BC must not exceed 1.618

• Point C point must be within the range of 0.382–0.886 retracement

• The point D must be precise 0.786 of the XA leg

• Ideally, AB must be equivalent to CD in length

• Ideally, the time required for the formation of AB equals the time required for the formation of CD

(4)** The Bat Pattern**

The Bat pattern is considered a very reliable formation. A strong advantage when trading the Bat pattern is that you can place a tight stop-loss. A tight stop-loss means a great Reward/Risk ratio.

**Bat Pattern Key Characteristics**

• The point B must be less than the 0.618 retracements of XA line, preferably the 50% or the 38.2% retracement of XA line

• The BC projection must be at least 1.618

• The point C ranges between 0.382 and 0.886

(5)** The Crab Pattern**

The Crab is a harmonic 5-point formation. The completion of the pattern is confirmed by the XA projection at 1.618.

**Crab Pattern Key Characteristics**

• Point B is the 0.618 or less retracement of XA line

• BC projection is 2.618 or 3.618

• XA projection at 1.618

• Point C ranges between 0.382 and 0.886

(6)** The Butterfly Pattern**

The butterfly pattern, discovered by Bryce Gilmore, is another 5-point formation.

**Ideal Butterfly Pattern Key Characteristics**

• Point B retraces 78.6% B of XA line

• The projection of BC must be 1.618, or more

• AB=CD must be met. There are alternatives but AB=CD is the most common

• Point C point must range between the 0.382–0.886 retracement

**Tips When Trading Using Harmonic Patterns**

First of all, you must make sure that your pattern calculations are correct. These are some additional tips:

**1. Focus on Harmonic Patterns in Longer Timeframes**

Don't try to spot harmonic patterns in short timeframes (M1, M5), they are not reliable.

**2. Pre-preparation**

Create a list of trades that are approaching PRZ levels. PRZ means Potential Reversal Zone. After, insert automated alerts to trade them manually.

**3. Use Pending Orders**

If you don't have the time to monitor constantly the price action you can insert pending orders that will be activated if the price action meets certain criteria. Professional day-traders are always using pending orders.

**4. Read the History of Price Action**

History tends to repeat itself. Start reviewing the prior trades of the asset you are willing to trade and try to understand how the price action has confirmed reversals in the past.

**5. Create a Trading Plan and Stick to it**

It is very important to keep a trading plan and stick to it with discipline. When the market conditions are getting sloppy the only thing that can protect you is a trading plan.

W. D. Gann wrote in the “Truth of the Stock Tape” (1923):

“Have a well-defined plan before you start trading, then follow that plan, as the architect does in building a house, or the engineer in constructing a bridge or driving a tunnel. The man who changes his ideas or his plan, which are based on something practical, for no other reason than that he hopes or fears the market will do something different, will never make a success.”

More on Google: https://books.google.gr/books?isbn=093909312X

**6. Don't Over-Trade**

The most important thing when trading is to stay alive. If you stay alive and you have the talent, the money will flow in the long-run. When you overtrade in a position you increase the overall market risk of your portfolio and that means bad news in the long-run.

**Confirming Harmonic Price Reversals**

After the price has reversed from a harmonic area the key factor determining whether you should open a trade position or not is to evaluate the price action after the reversal. These are some price action features that can help traders confirming the reversal.

(1) Existence of reversal candlestick pattern

(2) Increase in volume and volatility(3) The quicker the reversal, the greater the potential for a strong move

(4) The reversal is confirmed by MACD on its standard-setting (12,26,9), in the same timeframe (H1, H4, or D1)

**Harmonic Trading Setup**

Harmonic patterns are very profitable patterns with success ratio over 70%. The problem is that these patterns are rare and difficult to be identified, especially by non-professionals. There are many available plug-ins for MT4 and MT5 which promise to do that job automatically. For those traders wishing to spot and to trade harmonic patterns, these are some basic questions that all valid setups must take into consideration.

1. Does price action indicate the existence of a potential pattern?

2. What is this pattern?

3. Is it a basic ABCD pattern or another harmonic pattern?

4. Are there any other harmonic patterns in other timeframes that can confirm or can cancel this pattern?

5. Do time cycles confirm the existence of this pattern? (Time symmetry)

6. Where does the pattern come to completion?

7. At what price the pattern will not be longer valid? (Close to this price you may place your Stop-Loss order)

8. What is the optimal price for taking my profits (Take-Profit order)

9. What is the Risk/Reward of that trade? (Risk/Reward must be above 2:1 or even better above 3:1)

10. How much of my capital should I risk in this trade? (Choosing Capital Leverage)

■ Guide to Harmonic Trading and Harmonic Patterns

TradingFibonacci.com

Sources:

- (i) TradingCenter.org
- (ii) Harmonic Trading, Volume One {Scott M. Carney}

Compare Online Brokers: » Compare ECN / STP Brokers

Chart Patterns: » Elliott Waves | » Candlestick Formations | » Triangles Formations | » Choosing the Timeframe | » Chart Patterns