First Step in
Trading Harmonic Price Patterns
Locate a potential Harmonic Price Pattern
Oh wow, that looks like a potential Harmonic Price Pattern!
At this point in time, we’re not exactly sure what kind of pattern that is. It
LOOKS like a three-drive, but it could be a Bat or a Crab…
Heck, it could even be a Moose! In any case, let’s label
those reversal points.
"If something stands between you and your success, move
it. Never be denied."
By Dwayne ‘The Rock’ Johnson.
3 Steps in Trading Harmonic Price
Patterns
As you may have guessed, profiting
off Harmonic Price Patterns is all about being able to spot those “perfect”
patterns and buying or selling on their completion.
There are three basic steps in
spotting Harmonic Price Patterns:
Step 1: Locate a potential Harmonic
Price Pattern
Step 2: Measure the potential
Harmonic Price Pattern
Step 3: Buy or sell on the
completion of the Harmonic Price Pattern
By following these three basic
steps, you can find high probability setups that will help you grab those
oh-so-lovely pips.
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The Butterfly
Then, there is the Butterfly pattern. Like Muhammad Ali, if
you spot this setup, you’ll surely be swinging for some knockout-sized pips!
Created by Bryce Gilmore, the perfect Butterfly pattern is
defined by the .786 retracement of move AB with respect to move XA. The
Butterfly contains these specific characteristics:
-Move AB should be the .786 retracement of move XA.
-Move BC can be either .382 or .886 retracement of move AB.
-If the retracement of move BC is .382 of move AB, then CD
should be 1.618 extension of move BC. Consquently, if move BC is .886 of move
AB, then CD should extend 2.618 of move BC.
-CD should be 1.27 or 1.618 extension of move XA.
"Be the master of your fate not the slave of your
problems."
By Marinela Reka
"Difficult roads often lead to beautiful destinations."
By Author Unknown.
The Bat
Come 2001, Scott Carney founded another Harmonic Price
Pattern called the “Bat.” The Bat is defined by the .886 retracement of move XA
as Potential Reversal Zone. The Bat pattern has the following qualities:
-Move AB should be the .382 or .500 retracement of move XA.
-Move BC can be either .382 or .886 retracement of move AB.
-If the retracement of move BC is .382 of move AB, then CD
should be 1.618 extension of move BC.
Consquently, if move BC is .886 of move AB, then CD should be 2.618
extension of move BC.
-CD should be .886 retracement of move XA.
"There are no secrets to success. It is the result of
preparation, hard work, and learning from failure.."
By Colin Powell.
The Animals
As time went by, the popularity of
the Gartley pattern grew and people eventually came up with their own
variations.
For some odd reason, the
discoverers of these variations decided to name them after animals (Maybe they
were part of PETA?).Without further ado, here comes the animal pack…
The Crab
In 2000, Scott Carney, a firm
believer in harmonic price patterns, discovered the “Crab”.
According to him, this is the most
accurate among all the harmonic patterns because of how extreme the Potential
Reversal Zone (sometimes called “price better reverse or imma gonna lose my
shirt” point) from move XA.
This pattern has a high
reward-to-risk ratio because you can put a very tight stop loss. The “perfect”
crab pattern must have the following aspects:
Move AB should be the .382 or .618
retracement of move XA.
Move BC can be either .382 or .886
retracement of move AB.
If the retracement of move BC is
.382 of move AB, then CD should be 2.24 of move BC. Consquently, if move BC is
.886 of move AB, then CD should be 3.618 extension of move BC.
CD should be 1.618 extension of
move XA.
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Gartley a.k.a. “222″ Pattern
The Gartley “222″ pattern is named for the page number it is
found on in H.M. Gartleys book, Profits in the Stock Market. Gartleys are
patterns that include the basic ABCD pattern we’ve already talked about, but
are preceded by a significant high or low.
Now, these patterns normally form when a correction of the
overall trend is taking place and look like ‘M’ (or ‘W’ for bearish patterns).
These patterns are used to help traders find good entry points to jump in on
the overall trend. A Gartley forms when the price action has been going on a
recent uptrend (or downtrend) but has started to show signs of a correction.
What makes the Gartley such a nice setup when it forms is
the reversal points are a Fibonacci retracement and Fibonacci extension level.
This gives a stronger indication that the pair may actually reverse.
This pattern can be hard to spot and once you do, it can get
confusing when you pop up all those Fibonacci tools. The key to avoiding all
the confusion is to take things one step at a time. In any case, the pattern
contains a bullish or bearish ABCD pattern, but is preceded by a point (X) that
is beyond point D. The “perfect” Gartley pattern has the following
characteristics:
1.Move AB should be the .618 retracement of move XA.
2.Move BC should be either .382 or .886 retracement of move
AB.
3.If the retracement of move BC is .382 of move AB, then CD
should be 1.272 of move BC. Consquently, if move BC is .886 of move AB, then CD
should extend 1.618 of move BC.
4.Move CD should be .786 retracement of move XA
"Our greatest glory is not in never falling but in
rising every time we fall."
By Confucius
"Rise above the storm and you will find the sunshine."
By Mario Fernandez.
The Gartley and the Animals
Once upon a time, there was this insanely smart trader dude
named Harold McKinley Gartley.
He had a stock market advisory service in the mid-1930s with
a huge following. This service was one of the first to apply scientific and
statistical methods to analyze the stock market behavior.
According to Gartley, he was finally able to solve two of
the biggest problems of traders: what and when to buy.
Soon enough, traders realized that these patterns could also
be applied to other markets. Since then, various books, trading software, and
other patterns (discussed below) have been made based on the Gartleys.
"Ships in harbour are safe, but that’s not what ships
are built for."
By John Shedd.
Three-Drive
The three-drive pattern is a lot like the ABCD pattern
except that it has three legs (now known as drives) and two corrections or
retracements. Easy as pie! In fact, this three-drive pattern is the ancestor of
the Elliott Wave pattern.
As usual, you’ll need your hawk eyes, the Fibonacci tool, and
a smidge of patience on this one.
As you can see from the charts above, point A should be the
61.8% retracement of drive 1. Similarly, point B should be the 0.618
retracement of drive 2. Then, drive 2 should be the 1.272 extension of
correction A and drive 3 should be the 1.272 extension of correction B.
By the time the whole three-drive pattern is complete,
that’s when you can pull the trigger on your long or short trade. Typically,
when the price reaches point B, you can already set your short or long orders
at the 1.272 extension so that you won’t miss out!
But first, it’d be better to check if these rules also hold
true:
-The time it takes the price to complete drive 2 should be
equal to the time it takes to complete
drive
-Also, the time to
complete retracements A and B should be equal.
"Even if you are on the right track, you’ll get run
over if you just sit there."
By Will Rogers.
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The ABCD
Let’s start this lesson with the simplest harmonic pattern,
and what could be more basic than your good ole ABC’s? We’ll just pop in another
letter right there (because we’re cool like that) and we’ve got the ABCD chart
pattern!
To spot this chart pattern, all you need are ultra-sharp
hawk eyes and the handy-dandy Fibonacci tool.
For both the bullish and bearish versions of the ABCD chart
pattern, the lines AB and CD are known as the legs while BC is called the
correction or retracement. If you use the Fibonacci retracement tool on leg AB,
the retracement BC should reach until the 0.618 level. Then, the line CD should
be the 1.272 Fibonacci extension of BC.
Simple, right? All you have to do is wait for the entire
pattern to complete (reach point D) before taking any short or long positions.
Oh, but if you want to be extra strict about it, here are a
couple more rules for a valid ABCD pattern:
-The length of line AB should be equal to the length of line
CD.
-The time it takes for the price to go from A to B should be
equal to the time it takes for the price to
move from C to D.
"If you have a strong commitment to your goals and
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possible."
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"The one who follows the crowd will usually get no
further than the crowd. The one who walks alone, is likely to find himself in
places no one has ever been."
By Albert Einstein.
Harmonic Price Patterns
In this lesson, we’re going to discuss the following
Harmonic Price Patterns:
-ABCD Pattern
-Three-Drive Pattern
-Gartley Pattern
-Crab Pattern
-Bat Pattern
-Butterfly Pattern
-Phew! That’s quite a lot to cover!
But don’t you worry… Once you get the hang of things, it’ll be
as easy as 1-2-3! We’ll start off with the more basic ABCD and three-drive
patterns before moving on to Gartley and the animals.
After learning about them, we’ll take a look at the tools
you need in order to trade these patterns successfully.
For all these harmonic patterns, the point is to wait for
the entire pattern to complete before taking any short or long trades. You’ll
see what we’re talking about later on so let’s get started!
"If you don’t have what you want; work harder."
By Anonymous.
Harmonic Price Patterns
Now that you’ve got the basic chart patterns down, it’s time
to move on and add some more advanced tools to your trading arsenal.
I
n this lesson, we’ll be looking at harmonic price patterns.
These bad boys may be a little harder to grasp but once you spot these setups,
it can lead to some very nice profits!
The whole idea of these patterns is that they help people
spot possible retracements of recent trends. In fact, we’ll make use of other
tools we’ve already covered – the Fibonacci retracement and extensions!
Combining these wonderful tools to spot these harmonic
patterns, we’ll be able to distinguish possible areas for a continuation of the
overall trend.
"Even if you fall on your face you’re still moving for
ward."
By Victor Kiam.
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Summary of Riding Elliott’s Waves
There are three cardinal rules in labeling waves:
Rule Number 1: Wave 3 can NEVER be the shortest impulse wave
Rule Number 2: Wave 2 can NEVER go beyond the start of Wave
1
Rule Number 3: Wave 4 can NEVER cross in the same price area
as Wave 1
If you look hard enough at a chart, you’ll see that the
market really does move in waves.Because the market never moves in text book
perfect fashion, it will take many, many hours of practice analyzing waves
before you start to get comfortable with Elliott waves. Stay diligent and never
give up!
"What lies behind us and what lies before us are tiny
matters compared to what lies within us."
By Ralph Waldo
Emerson.
"It is difficult to say what is impossible, for the
dream of yesterday is the hope of today and the reality of tomorrow."
By Robert
H.Goddard
Riding Elliott’s Waves
-Elliott Waves are fractals. Each wave can be split into
parts, each of which is a very similar copy of the whole. Mathematicians like
to call this property “self-similarity”.
-A trending market moves in a 5-3 wave pattern.
-The first 5-wave pattern is called impulse wave.
-One of the three impulse waves (1, 3, or 5) will always be
extended. Wave 3 is usually the extended one.
-The second 3-wave pattern is called corrective wave.
Letters are used instead of numbers to track the correction.
-Waves 1, 3 and 5, are made up of a smaller 5-wave impulse
pattern while Waves 2 and 4 are made up of smaller 3-wave corrective pattern.
-There are 21 types of corrective patterns but they are just
made up of three very simple, easy-to-understand formations.
-The three fundamental corrective wave patterns are
zig-zags, flats, and triangles.
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