Harmonic Patterns were initially proposed by H.M. Gartley in the year 1932. The trading fraternity, at that point, shrugged it off. However, when Scott Carney provided deep insights into harmonic patterns in his book, “Harmonic Trading”, the trading community welcomed it with both hands. There are several types of harmonic patterns — AB=CD pattern, Gartley pattern, Butterfly pattern, Bat pattern, Shark pattern, Crab pattern and Cypher pattern.
What are Harmonic Patterns?
Harmonic patterns are trend reversal patterns. They are based on the Fibonacci retracement and extensions and geometric structures. The harmonic patterns provide traders the potential reversal zone (PRZ), which help to hop in reversal trades at the brink of exhaustion. Each type of pattern has a different geometrical shape and Fibonacci ratio.
Potential Reversal Zone (PRZ)
The motto of the Harmonic pattern is to find the points which have a high probability of rendering a reversal. Most patterns delegate the point D to be the potential reversal zone. It is also identified as potential completion zone since the pattern completes its formation at that point.
The AB=CD pattern is the basic form of harmonic patterns. It combines the Fibonacci retracement and extension rule to identify the potential reversal zone. It has four pivotal points A, B, C, D.
When the rally of CD is equal to the rally of AB, in time, length and distance, the chances of profit booking enhances.
Criteria for AB=CD pattern
BC retraces to 61.8 – 78.6% of AB.
CD extends of 127.2 – 161.8 % of AB.
Gartley patterns are the type of harmonic patterns which look similar to ‘M’ and ‘W’. They are also based on the Fibonacci ratio and extension principle and contain an ABCD pattern within them.
Criteria for Gartley pattern
The point X is beyond the point D.
AB retraces to 50% -61.8% of XA.
BC retraces to 61.8% – 88.6% of AB.
Consequently, CD retraces to 78.6 % of XA and extends to 127.2% – 161.8 % of AB.
The Butterfly pattern is a variant of the Gartley pattern. All the harmonic patterns look similar to each other, but the Gartley pattern and butterfly pattern are the ones most identical bearing only one dissimilarity.
Unlike the Gartley pattern, the CD is not a retracement of XA; it is an extension of XA indeed.
Criteria for the Butterfly pattern
AB retraces to 76.8% of XA.
BC retraces to 38.2% – 88.6% of AB.
Finally, CD extends to 127.2% – 161.8% of XA and 161.8% – 261.8% of BC.
Crab Pattern also fit into the Gartley pattern family. In fact, it is the stretched butterfly pattern. The criteria and ratio are the exact similar to butterfly harmonic pattern expect that the CD leg overextends.
Criteria for Crab Pattern
AB retraces to either 38.2% or 61.8 % of XA.
BC retraces to 38.2% or 88.6% of AB.
If BC retraces to 38.2%, then CD extends to 224% of BC.
If BC retraces to 88.6%, then CD extends to 361.8% of BC.
CD should also extend to 161.8% of XA.
The bat pattern is frequently recurring among harmonic patterns. It is also a look-alike of the Gartley pattern.
Criteria for Bat Pattern
AB retraces only 38.2% or 50% of XA.
BC retraces to either 38.2 % or 88.6 of AB.
If BC retraces to only 38.2%, then CD extends up to 161.8% of BC.
Suppose, if BC retraces to 88.6%, then CD extends to 261.8% of BC.
Consequently, CD should retrace to 88.6% of XA.
The shark pattern is the latest entrant in harmonic patterns family and in technical analysis, discovered in 2011 by Scott Carney. It is similar to the crab pattern. However, the shark pattern uses a different type of labeling than other harmonic patterns- O, X, A, B, C.
Criteria for Shark pattern
There is no relation between OX and XA waves.
AB extends to 113% – 161.8% of OX.
BC extends to 113% of OX.
Consequently, BC extends to 161.8% – 224% of OX.
Cypher pattern is not discovered by Scott Carney or H.M. Gartley, but it is included in the Harmonic patterns family due to its similarity of structure and usage. The cypher pattern does use the XABCD labeling. It is also a reversal pattern deploying traders to potential reversal zone (PRZ).
Criteria for Cypher pattern
AB retraces to 38.2% or 61.8 % of XA.
BC extends upto a range of 113% – 141.4% of AB.
Unlike any other, CD retraces to 78.2% of XC.
D is the potential reversal zone.
Harmonic Patterns: Conclusion
The harmonic patterns identify trend reversal at the outset. But, it is essential to look out for weakening signs of the trend before hopping into a trade. Some analysts are of the opinion that the potential reversal zone is merely a profit booking zone and it does not construe a reversal. Whereas others use harmonic patterns to trade the potential completion zone rather than reversal. However, it is certainly a useful tool in your kitty and practice makes the application easier. But, if you’re struggling to memorize the ratios, better bookmark this page, to make your trading easier.