As a beginner, you can use different tools for identifying market trends and trading opportunities. Among others, one of the best examples of the latter is harmonic patterns.
Even if harmonic trading patterns can be useful, such is the case only if you know how to use them. You must understand the fundamentals of each pattern. Learn which is most suitable for a specific scenario.
Read on and find out the different types of harmonic patterns. I’ll give you a rundown of what they mean, so you can pick the right one!
What are Harmonic Patterns?
In a nutshell, harmonic patterns are technical analysis tools. Traders use them to assess price movements and predict the future direction. In addition, it analyzes the extent of the next movement, making it vital for making the right trading decision.
Similar to most trading patterns, harmonics are most effective if you trade only after their formation. Using them too early is a mistake you must avoid. You also need patience, as the outcomes will not materialize overnight.
Fibonacci patterns are among the most important components when using harmonics. These numbers start with 0 and 1, followed by the sum of the two previous numbers. From these numbers are ratios, which can provide insights into the direction of the trading market.
The use of harmonics results in the creation of geometric patterns. Meanwhile, these patterns rely on Fibonacci sequences. In turn, it provides details about possible price targets and entries, among other things.
It’s also crucial to note that these patterns are advanced trading strategies. Therefore, they’re not for beginners. Instead, they benefit those with more trading experience.
Detecting harmonic patterns can be difficult, especially for beginners. Luckily, you can use a harmonic scanner. The latter is a tool that automates the search and analysis of relevant trading patterns.
Harmonic Pattern Types
Different types of harmonic patterns are available. Each pattern can uncover different trends. Below, we’ll give you a rundown of some patterns to use for harmonic trading.
H.M. Gartley introduced the use of harmonics in trading in the book Profits in the Stock Market. No wonder, the Gartley pattern is one of the earliest that traders used. It’s also the most common among all patterns.
The Gartley appears when a price moves in an uptrend or downtrend and starts to correct. Using these patterns provides valuable insights into the extent and timing of price movements.
In most cases, traders don’t use the Gartley pattern on its own. Instead, they combine it with other technical indicators to yield more favorable results.
Lastly, this pattern can be bearish or bullish, depending on its direction. Point D is the deciding point, which indicates whether the trader should buy or sell. These patterns often show up during a market correction.
Its name can already give you an idea of what it looks like. It’s a five-point reversal pattern with two peaks that look like the wings of a butterfly on both sides. The butterfly has four legs — X-A, A-B, B-C, and C-D.
You can find it in two forms. First, it can be a bullish butterfly, which shows you should buy. Second, it can be a bearish pattern, which indicates the need to sell.
One of the biggest differences from the Gartley is that the butterfly has a Point D that goes beyond Point X.
Like other trading patterns, it isn’t 100% correct. It would help to put a stop-loss, which will limit your risk exposure.
Scott Carney introduced this pattern in 2001. Visually, it’s almost similar to the Gartley. However, the bat pattern has different measurements.
The name of this harmonic pattern is a reference to its appearance. Its end looks like a bat.
The high accuracy of this pattern is one of its best assets. Compared to most harmonic patterns, the bat has a reputation for requiring a smaller stop-loss. The risk that confronts the trader is lower.
It’s a kind of retracement and continuation pattern. The formation is triggered by a temporary trend reversal. As a result, you can get in at a good price.
It’s a harmonic candlestick pattern that looks like a butterfly pattern. You’ll see five points and four price swings, which are typical of other harmonics.
One thing to note about the crab pattern is that it’s an extreme pattern. Therefore, it’s highly volatile. As always, be cautious and calculate the risks to prevent crippling losses in your trades.
By understanding the crab, it’s easier for the trader to enter a market during extremely low and high points.
Identify a bullish pattern through the formation of the first leg during a sharp increase in price from X to A. Meanwhile, the market is bearish when there’s a drop from X to A.
The Deep Crab
Understanding the concept behind the crab pattern will make it easier to learn about the deep crab. It’s a variation with a five-point extension. Aside from the crab, it also has influences from the bat pattern.
Along with the crab, the deep crab can provide confirmations of overbought and oversold assets. It often results in a sharp reaction. Most traders assume that it’s one of the most profitable harmonic patterns you can use.
In addition, it can give you an idea of how to set stop-loss. Meanwhile, you must take a long or short position after the formation of the CD leg.
Last on the list is the shark harmonic pattern. It’s one of the newest harmonic patterns on the list. It was introduced in 2011 by Scott Carney.
A unique feature this pattern possesses is the Extreme Harmonic Impulse Wave. The latter retests the identified support or resistance. By looking at the chart, you can have an idea of a potential trend reversal.
More so, the shark is popular because of its accuracy. Traders are using this pattern for defining their entry point, profit target, and stop loss. It also has a good risk-reward ratio.
Nonetheless, it has drawbacks. For instance, it’s complicated. Although, the latter applies to other harmonics as well, not just the shark pattern.