Harmonic patterns form a complex type of pattern in a trading chart. They use Fibonacci levels along with geometric price actions. Named after its founder, harmonic trading was introduced back in 1932. Harold McKinley Gartley constructed a new pattern that was further described in one of his popular books about stock trading.
The main reason to use this complex tool is the ability to identify a PRZ (potential reverse zone) with a high probability, minimize the risk of potential loss and eventually enter the trade. As stated earlier, the strategy is based on Fibonacci numbers and patterns to locate the potential occurrence of the price turning point.
Why Harmonic Trading Is Important?
The main reason to use harmonic patterns is the opportunity to foresee the price reversal. Patterns help to predict price movement thanks to the difference in magnitude, length, and other crucial parameters day traders use to make accurate forecasts. Harmonic trading applies to different types of assets that include stocks, currency pairs, options, etc.
What's more, harmonic patterns have proved to be a very precise instrument when it comes to identifying price reversal. This is due to their ability to locate and characterize the most specific price movements.
Types and Forms of Harmonic Patterns
Traders may come across different types of harmonic patterns. Some of them have proved to be efficient while others failed to ensure accurate price tracking. In this article, we will highlight only major types that are frequently used by traders of different levels. Each of them has stood the test of time.
Harmonic Pattern Types: The Gartley
Named after its founder and published in one of his books, this pattern type is based on Fibonacci levels. It mainly refers to the bullish category that usually signals about correcting waves that are about to end followed by the price moving upwards.
Harmonic Pattern Types: The Butterfly
This pattern works in a different way if compared to the previous one. It also has a point D. However, it extends beyond point X. As a result, we actually have an example of how a bearish pattern can break the numbers down.
Make sure, you have the confirmation for the price moving down before you enter the trade. Placing a stop loss above (not too far) will also be a good solution.
Harmonic Pattern Types: The Bat
Traders should not be misled by the way this harmonic pattern looks like. Its structure is similar to what we have seen in the Gartley pattern. However, the measurements are different.
Harmonic Pattern Types: The Crab
Most traders consider this pattern as one of the most accurate and precise ones. It is not afraid of Fibonacci numbers indicating close proximity when identifying the reversal. Once again, we can see the pattern that is similar to the Butterfly structure. But the measurements are completely different.
Pros and Cons of Harmonic Pattern Trading
Although harmonic trading patterns can be very precise whenever you need to forecast the price movement, they are not perfect. What's more, they can sometimes be misleading if you do not know how to read them. On the other hand, those patterns certainly have some crucial advantages.
Harmonic Trading Pros:
- Helps to make stop losses and future projections beforehand.
- High level of accuracy.
- Standardized trading rules when used with Fibonacci ratios.
- Suitable for any timeframe or trading instrument.
- Can be used with other technical indicators, strategies, or theories.
Harmonic Trading Con:
- Not good for beginners, difficult to figure out.
- Hard to read the pattern correctly and make definitions.
- Can counteract with Fibonacci levels.
When used wisely, harmonic patterns can be very useful when determining the price movement and reversal. However, you need to make sure you have signal confirmation as well as stop-losses located not far away to minimize the risk.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.