harmonic patterns overview part one

21 ก.พ. 2023

Intro/Overview

Harmonic patterns are specific patterns or formations that form naturally on financial charts. A harmonic pattern forms on the basis of geometric price action and Fibonacci retracements/ extension levels.

Harmonic patterns, if correctly identified, help traders understand price action and predict the direction of the price. Furthermore, these patterns are trend reversal patterns. They enable traders to initiate a position in a high probability reversal zone.

Most patterns are based on specific XABCD ratios, which are normally fib ration.
Primary important fibs for XABCD setup: 0.618, 0.786, 0.886, 1.27, 1.62

Part One overview of the patterns

In the part one of the overview let's review the six
patterns that can be frequently identified in financial markets.

Bearish Butterfly Pattern
Look for sell setups at point D.

The butterfly pattern is a reversal chart pattern that is in the category of harmonic patterns. It shows price consolidation and is mostly noticed at the end of an extended price move.
The harmonic butterfly pattern, like all other harmonic patterns, is a reversal trading pattern that can be universally traded all the time. Some people prefer to trade them on higher time frames.
The butterfly pattern is made up of four legs marked X-A, A-B, B-C, and C-D. It helps traders determine when a current price move is probably getting to its end.

Bearish butterfly you want to look for sell setups, once X,A,B,C,D points are established already,
best sell setups at point D, which is a 127 extension.

Starting with the bearish butterfly, after the downtrend creates the XA wave, the market rebounds higher to point B, which must be a 78.6% retracement of the XA downtrend. Apply your Fibonacci retracement tool from point X to point A, then activate the 78.6% and 127% levels (we’ll use the 127% level later.)

Beginning from point B, the market experiences another downtrend to point C. However, the strength of the second leg down (BC) isn’t as strong as the first XA trend lower.

Additionally, point C generally retraces about 38.2% to 88.6% of the AB leg. As a result, point C is a partial retracement of AB, and doesn’t break below the low price at point A. Apply another Fibonacci drawing starting from point A to point B, and activate the 38.2% and 88.6% levels.

Bullish Butterfly Pattern
Look for buy setups at point D.

The Bullish Butterfly Pattern is a reversal pattern with four distinct swings in price or legs, it is similar to both the Bullish Gartley and Bullish Bat Patterns. The butterfly pattern tries to identify when a current price swing in progress is likely getting near its end. It's an inverted bearish butterfly pattern setup.

XA: This is the initial move that forms that pattern. No specific rules are required for this move.
AB: The B point is the most critical level for the Butterfly 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.

Bearish Bat Pattern
Look for sell setups at point D.

The Bat pattern is similar to the Butterfly pattern in that it is a retracement and continuation pattern that occurs when a trend temporarily reverses its direction but then continues on its original course.
Pattern completes – at an 88.6% Fibonacci retracement of the X-A leg. Its inner retracements are also slightly different. The main rules of the bat pattern are as follows: AB leg can retrace between 38.2% – 50% of XA leg. BC leg can retrace between 38.2% – 88.6% of AB leg. CD leg can retrace up to 88.6% of XA leg.

X-A
In its bullish version, the first leg forms when the price rises sharply from point X to point A. This is the pattern's longest leg.
A-B
The A-B leg then sees the price change direction and retrace 38.2% to 50% of the distance covered by the X-A leg.
B-C
In the B-C leg, the price changes direction again and moves back up, retracing anything from 38.2% to 88.6% of the distance covered by the A-B leg. If it retraces up beyond the high of point A, the pattern becomes invalid.
C-D
The C-D leg is the final and most important part of the pattern. As with the Gartley pattern, this is where the Bat pattern completes and you place your long (buy) trade at point D.

With the Bat pattern, however, you look to place your trade entry order at the point where the C-D leg has achieved an 88.6% retracement of the X-A leg. Ideally, point D should also represent a 161.8% to 261.8% extension of the B-C leg.

Bullish Bat Pattern
Look for buy setups at point D.

In a bullish Bat pattern, the X-A leg is formed by a sharp price rise. In A-B, the price then reverses and retraces 38.2% to 50% of the X-A leg. The B-C leg sees the price reverse again and retrace 38.2% to 88.6% of the A-B leg. In the final leg C-D, the price reverses and achieves an 88.6% retracement of the X-A leg.

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 final leg within the Bat structure, and the most significant 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.

Bearish 3 drives pattern
Look for sell setups after final drive.

The three-drive is a uniqueprice pattern formed by three consecutive symmetrical 'drives' up or down. In its bearish form, the market is making three final drives to a top before a downtrend forms.
The three drives pattern is a reversal pattern characterised by a series of higher highs or lower lows that complete at a 127% or 161.8% Fibonacci extension. It can signal that the market is exhausted in its current move and a possible reversal is about to occur on the price chart.

Bullish 3 drives pattern
Look for buy setups after final drive.

The three-drive is a rare price pattern formed by three consecutive symmetrical 'drives' up or down. In its bullish form, the market is making three final drives to a bottom before an uptrend forms.
Symmetry is also key to a three-drive. The elapsed times of the retracements and drives should be symmetrical. If they aren't, then you haven't found a valid three-drive pattern.

Harmonic patterns overview part two

Please stay tuned for further updates, as I will be covering more
harmonic patterns in the coming days.

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