In this blog post, we review each structure in detail. Moreover, we will teach you how to create a trading setup based on harmonic chart patterns, which can be quite profitable. Unlike other Forex chart patterns , Harmonics are challenging to spot and draw, as we are talking about geometric figures. Secondly, they consist of a list of conditions required before the pattern can be considered as active and tradeable.

Also, harmonic chart patterns are quite rigid in their design. Unlike some other chart formations that leave some space to traders for interpretation, harmonic patterns offer clear and precise instructions on how to be identified, verified, and ultimately traded. The main reason for this is their association with Fibonacci numbers. As outlined in the introduction, harmonic patterns are based on Fibonacci numbers, where after numbers 0 and 1, each number is the sum of the two previous numbers.

Therefore, the Fibonacci sequence looks as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on. As a result, we get the famous Fibonacci retracement lines — You may be familiar with the three key Fibonacci extension levels used in trading: It is not precisely clear who designed the harmonic patterns, with the likeliest candidate being H.

One of the fundamental harmonic patterns is named after him. Scott Carney is another name frequently mentioned in this context. It is believed that the list of all harmonic patterns is much longer, but in general, five widely-accepted harmonic chart patterns are most popular among the trading community.

The section below will discuss the Gartley pattern, Bat Pattern, Butterfly Pattern, Cypher pattern, and the Crab pattern. Gartley is arguably the most common forex harmonic chart pattern. Named after H. As with every harmonic chart pattern, there are bullish and bearish versions of Gartley. Both have the same goal — help the overall trend to extend in the same direction.

Hence, Gartley is predominantly a continuation chart pattern that facilitates trend extension. Gartley uses a combination of Fibonacci retracements to come up with a final level that generates a buy signal. The basic idea behind this chart pattern, as well as with other harmonic formations, is that the price action follows a specific pattern. This way, a geometric shape is formed, as illustrated in the photo below.

Bullish and Bearish Gartley patterns. As seen in the illustration above, the Gartley consists of five different points.

They are marked by numbers 0, 1, 2, 3, 4 , or more frequently by letters X, A, B, C, D. For Gartley to be verified as such, the following requirements must be fulfilled in the first place:. The blue trend line in the illustration above signals the expected bullish move higher, once the price action reaches the region around point D.

The bearish Gartley follows the same guidelines, with the XA move being to the downside and the point D generating a sell signal.

A bat pattern looks very similar to Gartley, but it has different measurements. It is also considered to be a continuation pattern as the overall trend extends and the last point D ends within the initial XA move. The entire structure looks more symmetric compared to the Gartley formation. Bullish and bearish Bat patterns. Unlike the first two harmonic patterns, point D in the Butterfly chart pattern ends outside of the initial XA move.

Although the overall trend is ultimately extended higher, it is difficult to classify the Butterfly pattern as a continuation setup since point D travels below or above the X point. Bearish and bullish Butterfly patterns. The Cypher pattern is similar to Gartley, except that the BC correction should go beyond point A. Therefore, the BC is an extension of the AB move, rather than a retracement.

Bullish and Bearish Cypher patterns. Extremely long extensions characterize the Crab pattern. Bearish and Bullish Crab patterns. When trading harmonic patterns, it is crucial to understand the importance of flexibility. We use these chart formations to understand the stage in which the market is currently in and to format our investments and trades. Therefore, we must be flexible with following the precise requirements on one side, but also not go too far with flexibility and endanger the legitimacy of the pattern.

You should establish a balance between the rigid structure of harmonic patterns and the importance of following the guidelines in the first place. For instance, the Bat pattern tells us that the AB must come at It would be complicated, almost impossible, to identify a chart pattern with the exact price points hit to a pip.

Therefore, we advise you to allow some space for the market to trade around these levels. For instance, come near Some analysts also suggest that any retracement between In two examples below, we share tips on trading the Gartley patterns, which is the frequent and the most popular harmonic pattern. Following the pullback from point A, the price action retraces to the The BC leg also ends near the desired Finally, the sellers can force a mini-crash in the price action, pushing the price action pips lower.

Ultimately, point D comes at a We said that XD should be However, the pattern that we drew has the shape of a bullish Gartley. As such, you should carefully watch the way that price interacts at these levels to determine if you should stay in the trade further or exit. If a breakout through the A level occurs, then you can be fairly confident that the projected target at the The diagram above provides a visual representation of the general expectations during a bullish butterfly trade.

The magenta horizontal levels at points B, C, and A are the potential resistances on the way up to the final target. Watching price action at these levels carefully will help you to better manage your trade. There is no set progression for the Butterfly pattern, so it is important that you monitor the trade for the best exit opportunities.

The rules above are fully applicable to the bearish version of the Butterfly chart pattern but in the opposite direction. The first example we will study is a bearish Butterfly pattern. You will find the pattern below:. The red section on the chart highlights the bearish Harmonic pattern. We can clearly see the four moves that make up the butterfly pattern on the chart — XA, AB, BC, and CD. At the same time, the price swings respond to all the requirements of our Harmonic Butterfly pattern.

They are as follows:. After price reaches the Your Stop Loss order should be placed above the D point as shown on the image. The magenta levels on the chart indicate the different support zones that we are likely to encounter for this Short Butterfly trade. The black arrows point to the price reaction around these levels. Notice how they react, and turn from support into resistance as price breaks thru these key areas. The bears are overpowering the bulls at each of these levels.

This demonstrates the strength of the bearish move and the increasing likelihood of our final target being reached. Upon reaching this desired target we would close the trade with a profit. Have a look at the image below which displays a bullish butterfly formation.

The image shows a bullish Butterfly chart pattern that provides a tradable opportunity. The pattern is highlighed in red on the chart.

We see that the level of the swings respond as follows:. After the price reached the As such we have to think that in this case, we may not get any further extension in the CD leg.

Keep in mind, that in trading, we are working with probabilities and not certainties. As such, we must always be mindful of price action and what the market is telling us at any given moment and react accordingly.

With the excessive volatility, it would be wise to wait for the market to normalize before committing to a trade here. We can enter at the end of the second consecutive bullish candle. This is shown with the green circle on the chart. Notice the two magenta lines that indicate the top of C and the top of A. They create a resistance zone where the price shows clear hesitation. The price consolidates and dips a bit during this time.

It would certainly be a viable option to close out the trade here based on the price action evidence being presented to us at this time. Soon after, the price creates a sharp increase, and it eventually reaches the Notice that this time there are only two magenta levels indicating potential resistance points on the way up. Why are there only two in this case? This is because our entry signal comes after the price has already increased above the B bottom and so there is no point in marking this level as resistance.

The price may return to it and test it as a support, but this does not happen in our example. As you start searching and studying your charts for potential butterfly patterns, you may notice that some of the levels required to confirm the Butterfly pattern are not present in the default Fibonacci indicator within your platform. The standard Fibonacci Retracement tool consists of the following levels:.

But the Butterfly chart pattern requires some additional levels:. In this case, you need to manually add these specific levels to your default Fibonacci drawing tool. Take Your Trading to the Next Level, Accelerate Your Learning Curve with my Free Forex Training Program. Home Trading Articles Forex Futures Crypto Stocks Options.

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Traders and analysts forecast future price movements in Forex using different chart patterns. Forex Harmonic Patterns are geometric price formations that derive from Fibonacci retracement or extension lines.

Most likely established by H. M Gartley in , Harmonic Patterns depict potential price changes or trend reversal levels. The four main Harmonic Patterns that can have bullish or bearish versions receive the following names:. If you want to learn how to identify Forex Harmonic Patterns in a chart and use them to your advantage, keep reading.

In this blog post, we review each structure in detail. Moreover, we will teach you how to create a trading setup based on harmonic chart patterns, which can be quite profitable. Unlike other Forex chart patterns , Harmonics are challenging to spot and draw, as we are talking about geometric figures. Secondly, they consist of a list of conditions required before the pattern can be considered as active and tradeable. Also, harmonic chart patterns are quite rigid in their design.

Unlike some other chart formations that leave some space to traders for interpretation, harmonic patterns offer clear and precise instructions on how to be identified, verified, and ultimately traded. The main reason for this is their association with Fibonacci numbers. As outlined in the introduction, harmonic patterns are based on Fibonacci numbers, where after numbers 0 and 1, each number is the sum of the two previous numbers. Therefore, the Fibonacci sequence looks as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on.

As a result, we get the famous Fibonacci retracement lines — You may be familiar with the three key Fibonacci extension levels used in trading: It is not precisely clear who designed the harmonic patterns, with the likeliest candidate being H. One of the fundamental harmonic patterns is named after him. Scott Carney is another name frequently mentioned in this context.

It is believed that the list of all harmonic patterns is much longer, but in general, five widely-accepted harmonic chart patterns are most popular among the trading community. The section below will discuss the Gartley pattern, Bat Pattern, Butterfly Pattern, Cypher pattern, and the Crab pattern.

Gartley is arguably the most common forex harmonic chart pattern. Named after H. As with every harmonic chart pattern, there are bullish and bearish versions of Gartley. Both have the same goal — help the overall trend to extend in the same direction. Hence, Gartley is predominantly a continuation chart pattern that facilitates trend extension.

Gartley uses a combination of Fibonacci retracements to come up with a final level that generates a buy signal. The basic idea behind this chart pattern, as well as with other harmonic formations, is that the price action follows a specific pattern.

This way, a geometric shape is formed, as illustrated in the photo below. Bullish and Bearish Gartley patterns. As seen in the illustration above, the Gartley consists of five different points. They are marked by numbers 0, 1, 2, 3, 4 , or more frequently by letters X, A, B, C, D.

For Gartley to be verified as such, the following requirements must be fulfilled in the first place:. The blue trend line in the illustration above signals the expected bullish move higher, once the price action reaches the region around point D. The bearish Gartley follows the same guidelines, with the XA move being to the downside and the point D generating a sell signal. A bat pattern looks very similar to Gartley, but it has different measurements.

It is also considered to be a continuation pattern as the overall trend extends and the last point D ends within the initial XA move. The entire structure looks more symmetric compared to the Gartley formation. Bullish and bearish Bat patterns. Unlike the first two harmonic patterns, point D in the Butterfly chart pattern ends outside of the initial XA move. Although the overall trend is ultimately extended higher, it is difficult to classify the Butterfly pattern as a continuation setup since point D travels below or above the X point.

Bearish and bullish Butterfly patterns. The Cypher pattern is similar to Gartley, except that the BC correction should go beyond point A. Therefore, the BC is an extension of the AB move, rather than a retracement. Bullish and Bearish Cypher patterns. Extremely long extensions characterize the Crab pattern. Bearish and Bullish Crab patterns.

When trading harmonic patterns, it is crucial to understand the importance of flexibility. We use these chart formations to understand the stage in which the market is currently in and to format our investments and trades. Therefore, we must be flexible with following the precise requirements on one side, but also not go too far with flexibility and endanger the legitimacy of the pattern.

You should establish a balance between the rigid structure of harmonic patterns and the importance of following the guidelines in the first place. For instance, the Bat pattern tells us that the AB must come at It would be complicated, almost impossible, to identify a chart pattern with the exact price points hit to a pip. Therefore, we advise you to allow some space for the market to trade around these levels. For instance, come near Some analysts also suggest that any retracement between In two examples below, we share tips on trading the Gartley patterns, which is the frequent and the most popular harmonic pattern.

Following the pullback from point A, the price action retraces to the The BC leg also ends near the desired Finally, the sellers can force a mini-crash in the price action, pushing the price action pips lower.

Ultimately, point D comes at a We said that XD should be However, the pattern that we drew has the shape of a bullish Gartley. Hence, point D could be a buy signal. The entry point is at point D, or around the Some traders prefer to enter the market just before the price extends to The stop-loss is located below point X, a move that would invalidate the basic idea behind the Gartley pattern — the continuation.

In this case, the entry point is around There are different ways to calculate the take profit levels in harmonic patterns. First, you can set two separate orders, ranging from more conservative to more optimistic, to target a move to point B and a zone around the A and C points. This way, you would be partially closing your trade at The other popular method advises us to draw the Fibonacci retracement lines between the C and D.

This way, we should take a portion of the profits once the price action retraces to at least The other part would eventually run A-C. Hence, we risked 30 pips in our trade to make pips with one part of our trade, while the other part s would go to In this case, we have a bearish Gartley. The initial XA leg sets up the base for other legs to play out. You can see that the AB leg extends above the targeted Once the price extends We place the stop loss again above point X, which is in this case around pips above the mark D.

If we combine the two approaches still, it would mean that the first take profit target would have been hit at 0. Ultimately, we risked pips to make with one part of our trade, and around with the other. Harmonic chart patterns are precisely defined formations. As such, they provide us with crucial steps that we have to undertake to identify and ultimately trade these patterns correctly. Hence, the most significant advantage of harmonic chart patterns lies in their structure, which provides us with precisely defined levels to seek.

Based on the inputs of each harmonic chart pattern, we quickly identify the risk associated and profit expected. The Fibonacci ratios help us to identify the entry, stop loss, and take profit. As a result, all harmonic patterns usually generate a very attractive trading setup from the risk perspective. On the other hand, this preciseness and rigidness are what make them scarce. Even if we believe that we spotted a harmonic pattern, Fibonacci levels will not align in the pattern.

Hence, a lot of patience is required to detect, draw, and trade harmonics. Harmonic patterns are chart patterns that are based on Fibonacci numbers. This set of chart patterns is believed to be first introduced by H. The most popular harmonic is the Gartley pattern. At the same time, we also discussed the structures of other popular harmonic patterns, such as the Bat Pattern, Butterfly Pattern, Cypher pattern, and the Crab pattern.

We shared two examples to show how profitable harmonic patterns can be. Thanks to the Fibonacci-based structure of the harmonic patterns, we are equipped with an entry, and levels to place our stop loss and take profit orders. Ultimately, the risk-reward ratio through the harmonic patterns is what made these trading setups very attractive.

Therefore, the BC is an extension of the AB move, rather than a retracement. When the price actions begins to show signs of a reversal at that level, you would consider entering the trade. For instance, come near Soon after, the price creates a sharp increase, and it eventually reaches the share This:. Sign me up! As outlined in the introduction, harmonic patterns are based on Fibonacci numbers, where after numbers 0 and 1, each number is the sum of the two previous numbers.

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