The forex market is a force to reckon with at this age of technological progress. When you enter the market, you need to be prepared to face the market Expert. It means you are going against financial experts from banking institutions and forex technical analysis experts who have been trading for decades.
When trading in forex, you have to understand that you are going to a risk-bound area. This is why you have to prepare, by learning the most fundamental knowledge and strategy to use.
One method used is the harmonic patterns to study the price currents and make predictions. Harmonic patterns use Fibonacci numbers to identify the turning points in the price movement.
Without delay, let us get to breaking down what harmonic patterns are.
What are harmonic patterns in forex?
Harmonic patterns in forex are specific wave pattern formations in price charts, used by technical analyzers to predict the movement of the price curve. There are more than ten harmonic patterns used during technical wave analysis.
Harmonic patterns form geometric patterns using Fibonacci ratios. These patterns are repetitive on a price chart. That is why they are studied to know when they appear. Studying their formations will allow a trader to make predictions.
Harmonic patterns give the chance of stopping losses when you understand how the graph moves, you can predict when to sell and when to buy. The rules enforced when trading using harmonic patterns apply in the bull and the bear market.
Manually checking and calculating Fibonacci ratios may be hard to do. Modern methods of studying these patterns are provided, like harmonic pattern indicators. These tools can be used and are found in many trading platforms to make it easy for traders during technical analysis.
Types of harmonic patterns in forex
Harmonic patterns follow precise movement which needs careful study before you start trading. It is mandatory to know the type of pattern you want to use. Knowing ensures that you don’t mistake it for something else.
Let us first look at the top 5 most popular and utilized patterns in forex trade analysis. They are;
1. The ABCD pattern
2. The Gartley pattern
3. The Bat pattern
4. The Butterfly pattern
5. The Crab pattern
1. ABCD pattern
The ABCD is among the most simple harmonic patterns to study. AB and CD are both lines that come together to make a wave pattern. AB and CD lines are the legs or impulse waves while BC is a correction or a retracement.
Some of the rules that the ABCD pattern adheres to are;
· Line AB should be equal to CD in length.
· The time taken to move from A to B equals the time from C to D.
· The line BC should retrace 38.2% or 50% of line AB.
Although the ideal pattern, point C should be 61.8% or78.6% of AB.
· Point C is about 61.8% – 161.8% of line AB.
· If point C goes past point A then the pattern is null.
· If point D goes past point B then the pattern is null.
· There is a likely extension of 127.2% or 161.8% of pattern ABCD.
When studying the pattern, wait for the waves to complete each sequence. Wait for the waves to move through each point, strictly following the Fibonacci ratios to point D.
2. The Gartley pattern
This pattern is named a Gartley because it appeared in history for the first time when H.M. Gartley wrote about it. You can get this in his book ‘Profits in the stock market’, published in 1935.
Many professional traders use the Gartley pattern to analyze the price movements. This pattern starts with a correction wave and then resumes an ABCD pattern.
Its formation occurs in part like the ABCD pattern. It has an extra starting point X which means it has XABCD points.
For both the bull and bear versions of price movement, the following rules apply;
· Wave XA is the longest of all the legs.
· Wave AB retraces 61.8% of wave XA.
· If point B goes past point X the pattern is null.
· The Wave BC should retrace 38.2% to 88.6% of Wave AB.
· If point C goes past point A then the pattern is null.
· The line CD should retrace 78.6% of Wave XA.
· If point D goes past point X then the pattern is null.
· You can expect t an extension of the XABCD Gartley pattern by127% or 161%.
If any rules fail, the pattern fails. It means that it is another pattern in play you might have made a mistake.
When the price movement completes at point D, you can buy for a bull wave and sell if in a bear wave.
3. The Bat pattern
From the Gartley pattern we have studied, people made their revisions and created patterns. These patterns transmute from the Gartley pattern. One of these patterns is the bat pattern.
It was discovered in 2001 by Scott Carney a technical analysis expert in forex. This pattern also starts with a retracement but has a slight difference from the Gartley pattern. The leg CD retraces 88.6% of the wave AB.
It has 5 points with the extra X being the first point of the entire XABCD wave sequence. Using the bat pattern gives a good point to start a trade or, to enter the market.
The bat pattern follows the following rules;
· The wave XA is the longest, meaning it is the strongest of all the 4 waves.
· The wave AB should retrace 38.2% to 50% of wave XA
· If point B moves past point X then the pattern is null.
· The wave BC should retrace 38.2% to 88.6% of wave AB.
· If point C moves past point A then the pattern is null.
· Wave CD should retrace 88.6% of wave XA.
· Point D is a 161.8% to 261.8% of the wave BC.
Once the pattern is complete at point D then you can buy. What you need to pay attention to the most is the wave CD. This wave distinguishes the bat pattern from the Gartley pattern.
4. The butterfly pattern.
The butterfly pattern places you ahead of other traders because of a high potential for a reversal. This high possibility puts you in a position to get the next price pattern much earlier than the other traders.
This pattern could also have a drastic fail and requires a very tight stop loss arrangement. It allows you to enter the market in a high bull market and a low bear market.
The factor that makes a difference between a butterfly pattern and others is the CD wave. CD makes an extension of 127% of the XA wave. Point B is the key in this pattern it retraces an exact 78.6% of the wave XA which helps us define the other Fibonacci ratios.
The main rules when it comes to this pattern is;
· The wave AB should retrace 78.6% of XA.
· If point B moves beyond the tip of point X then the pattern becomes nullified.
· The wave BC should retrace 38.2% to 88.6% of the wave AB.
· If point C moves beyond the tip of point A then the pattern is nullified.
· The CD wave extends 127%-161.8% of the XA wave.
· The CD wave also extends 161.8% to 261% of the BC leg.
The butterfly pattern is easy to use and is trusted by many new and experienced traders. They also give solid indications because of how consistent their patterns are.
Conversely, the butterfly pattern is difficult to find because the pattern may appear at first on all the 3 legs but fail to form the 4th leg.
5. The crab pattern.
The crab pattern is also drawn from the Gartley pattern and is also a reverse pattern. It was discovered in 2001 by Scott Carney.
It can appear in both the bull and the bear market. Many forex traders use the crab pattern for analysis making it popular. It is reliable when you have enough practice in identifying the crab pattern. Also, make sure to follow the rules acutely.
The crab pattern has four legs. It has 5 points with ABCD being an extension of point X. The difference between the crab pattern and another Gartley pattern is the long XA and CD legs or waves.
The crab pattern is one of the best trading strategies because it has a higher profit affinity than loss. This is because once you have identified the crab pattern, the leg XA is a sure bet. In any case, you are mistaken, you can place a stop loss and still make a profit.
The rules that govern the crab pattern are;
· Wave AB should retrace 38.2% to 61.8% of wave XA.
· If point B moves beyond the tip of point X, the pattern is null.
· Wave BC retraces 38.2% to 88.6% of wave AB.
· If point C retraces past the starting point of the tip of point A, the pattern is null.
· Wave CD extends wave XA by 161.8%.
· Wave CD also extends wave BC by 224%-361.8%.
After point D is complete, then you can place a buy or sell order from point D.
When identifying a crab pattern, make sure to know at what points should not surpass each other. Another good point to help is that the wave BC forms within the distance of points X and A.
There is also a variation of the crab pattern known as a deep Crab. The wave leg /wave CD extends 161.8% of leg XA and a variation of 261.8% to 361.8% of BC.
Do harmonic patterns work?
Since the introduction of harmonic patterns by H.M. Gartley in 1935, many cryptocurrency investors, forex traders, stock market experts utilize them to improve their profits.
Many factors are at play in the market. Having a trading strategy gives you the leverage to make certain moves that will improve the profit margin.
Harmonic patterns are strategies that need work to understand, identify, apply the rules and master the concept. That is the reason why, after giving it the effort, you can rest assured that it pays off.
Harmonic patterns work if you follow the rules strictly and place all the stop-loss orders in place.
How do you use harmonic patterns in forex?
Many people use different types of methodology to enter the market according to how they see fit. Generally, the best way to trade is to follow three rules. No matter how you start, these rules are the fundamentals
The first rule. Identify a pattern on the price chart.
This rule sounds easy yet it is the most difficult of them all. There are different patterns, and getting one needs very sharp eyes as well as adequate knowledge.
Knowledge on which market is it the bull or the bear market, and then look at the price movement, which pattern is displaying on the screen. The rules and the legs should give you a hint of what you are looking at.
The second rule. Use the measuring tools to get accurate details.
Use the Fibonacci tools to get accurate measurements. The measurements help to narrow down to specifics. The ratios will tell you which pattern is on display.
The third rule. Make a buy or sell once the pattern is complete.
When you have completed rules one and two, you know the pattern that is on display. If you want to make any move, ensure you wait until the pattern you have identified is complete until the end of point D. If it is a bull market it is an indicator to buy, if it is a bear market you sell.
Which is the most profitable harmonic pattern?
Harmonic patterns are diverse and each come with their merits and faults. According to different active traders in the market, you cannot get one perfect pattern. Most professional traders argue that the Gartley pattern and its variations show more promise than other trading patterns.
Technical analysts advise that the pattern that brings the most profit is the one utilized correctly. We have discussed all the rules that you need to follow to make if you use harmonic patterns.
Once you have mastered how to trade one pattern of choice, you can say that the pattern is the most profitable.
Harmonic patterns are instrumental when making a technical analysis of price charts and patterns. Make sure to make appropriate risk management because these patterns are not 100% successful.
It is good to get all the knowledge on harmonic patterns. Also, get other factors that influence market volatility which dictates the price movement. Make the proper profit to loss calculations before venturing into any trading. be sure of the points you want to use to trade on a pattern and which pattern you are using.