Trade Harmonic Patterns on Forex Markets
Hello - and welcome to this site which is an introduction on how to trade harmonic patterns on the forex markets.
Harmonic pattern trading is a trading technique for forex, stocks, commodities etc - which is over 70% successful in identifying price reversals. They identify the best times for buying low, and selling high with high probability and low risk.
It's a rules-based method that provides an excellent structure and discipline required for consistent, successful trading.
As a result, more and more people trade forex harmonic patterns nowadays - it's become a burning hot topic in forex trading circles.
Now, I'm not an originator of harmonic methods by any means - but I'm happy to "add fuel to the fire" by promoting and explaining the harmonics methods I've learnt from the experts.
My harmonics mentors are primarily Chris Hall (www.FxGroundworks.com) and Scott Carney (HarmonicTrader.com).
If you're looking for a consistent trading method that puts the odds in your favour - then read on - you're in the right place to get started, with no obligation.
Trading Edge
It's all about getting a trading edge. By "trading edge" I mean - a consistent method that puts the odds in your favour. So that you know you can genuinely make more money than you lose.
There are only certain times when probability is on your side - and they are identified by the harmonic patterns. It's only during those times you have a distinct trading edge. Fortunately, hundreds of patterns occur every day on forex, so there are always plenty to choose from.
Harmonic patterns work by identifying potential high-probability, low-risk reversal trades. They enable you to get into a new trend earlier - and that provides an opportunity for lower risk and higher profit.
Harmonics have been used by professionals for over 75 years - but they have not always been readily accessible to everyone. Until recent years.
Trading harmonic patterns is a good way to get an edge in trading.
Risk Control
More importantly perhaps, harmonics identify a logical place to put a stop-loss - and where to take profits. Objectively.
That allows you to calculate your risk/reward ratio (RvR) before entering a trade.
This is the way Harmonics helps control risk, and set a target for taking profit. It's a process which is mechanical, objective and without guesswork or emotion. And it ensures you stay in the game in the long run and remain profitable.
Consistency - the "Holy Grail"
Now I'm not saying Harmonics is the proverbial "Holy Grail" of trading methods.
But if there really needs to be a trading holy grail - then a good candidate would have to be "consistency". All traders want consistent results - and that comes through being consistent yourself.
"Traders who are consistently successful are consistent as a natural expression of who they are. They don't have to try to be consistent; they are consistent." (Mark Douglas - Trading in the Zone)
If you trade harmonic patterns, you will become more consistent in your trading.
Getting Started
Whether or not you eventually switch to trade harmonics exclusively, or use harmonics to supplement your existing trading strategy is, of course, your choice. Either way if you can trade harmonic patterns, you'll have an effective trading strategy, with a sure way to get the odds in your favour.
It's not absolutely necessary to pay for subscriptions to "members only" sites, or purchase expensive training classes or buy costly software to get started.
Although it's definitely a good idea to join a harmonics trading community and find a mentor, if you want to speed up the learning curve to trade harmonic patterns.
You can find all you need to get started in these web pages, including how to join a harmonics trading community, get real-time harmonics alerts and download pattern recognition software.
In These Pages You Will Learn
- A forex trading strategy to trade harmonic patterns, proven to be over 70% successful for over 75 years
- How to identify high-probability/low-risk forex reversal trades on any timeframe, any currency pair, including commodities, indices and stocks
- How harmonics help you to control risk by objectively identifying the risk/reward ratio in advance of entering the trade.
- How to become a more consistent forex trader with more consistent results.
- How to get an edge over other traders
Where to Start
I recommend you start with the following pages first, to get a good overview of harmonic trading and introduction to the major harmonic patterns.
Harmonic Patterns
- Gartley Pattern
- Butterfly Pattern
- Bat Pattern
- Crab Pattern
The Gartley Pattern
The Gartley Pattern - Used by Professional Traders Since 1935
The Gartley pattern was first discovered by H.M.Gartley and described in his book "Profits in the Stock Market" in 1935. The book sold for $1500 - and had a limited distribution. It is sometimes called the Gartley "222" pattern - due to the page number of his book that it appears in.
Along with the Bat Pattern, the Gartley is a Retracement pattern. That means the X point has some significance. Namely, the X-point can be a significant Support/Resistance (Demand/Supply) level - and also the pattern is invalidated if the D point exceeds the X point.
Gartley claimed that for over 30 years this pattern was profitable in 7 out of 10 cases.
This has been supported by systematic tests conducted by FxGroundworks recently, which show pattern success rates of around 90%
Gartley Pattern Structure:
Bearish Gartley - and - Bullish Gartley
Key features to watch out for:
- Must have an AB=CD pattern that converges in the same area as the .786 Fibonacci on the XA, and also the 1.27 or 1.618 BC
- Pattern Symmetry - ideally the number of bars in the AB leg should be the same as the number of bars on the CD leg.
- The B point retracement ideally at .618 of the XA leg.
Generally, Fibonacci retracement ratios for the B point are .382 (for a small small correction), .618 (the preferred retracement) and .786 (large correction).
However, Scott Carney, in his book "Harmonic Trading - Vol 1", specifies that the precise XA retracements (Fibonacci retracement level from X to A) should be .618 to point B, and .786 to point D, for the most reliable results. As illustrated in the above picture.
Gartley Pattern Trading Tips
The nice thing about the Gartley is that you don't need to try to identify the top or bottom of a trend.
That's because the Gartley is used to trade tests of highs and lows in the direction of a trend. So the ideal place to find a Gartley pattern is in a bullish or bearish channel.
When not to trade a Gartley
I never trade Gartley's if they are not in a channel. And also, I very rarely trade a Gartley pattern if it is the first one in a channel.
I prefer to let the channel trend get established with 3 or more touch points off the top and bottom trend lines of the channel first. (That's just in case it's a false start and not really the start of a trend).
And, of course, I would not trade a bearish Gartley in a bullish channel - that just would not make sense at all.
Example Gartley
In the example below the channel has already been established with at least 3 touch points.
Bearish Gartley example
Pattern Failure
If the pattern fails, i.e. when price continues through the PRZ, it may push through Resistance at the X-level - in which case a new pattern is a possibility.
Be sure to watch out for another pattern to form - such as a Crab Pattern with the D point at a new Support/Resistance level.
After all, a failed Gartley pattern is an opportunity for another pattern to develop.
Further readng on harmonic patterns.
The Butterfly Pattern
The Butterfly Pattern is an extension harmonic pattern (that is - the D point exceeds the X point) and is used to trade highs and lows at key reversal points.
As an extension pattern, the CD leg extends towards a 1.272 to 1.618Fibonacci extension of the XA leg. Note, that Fibonacci extension can even be as far as 2.618 - but beyond that then the pattern is invalid.
Systematic tests by FxGroundworks showed Butterfly pattern success rates to be 87.4%-89.79%.
- B point must be a .786 Fibonacci extension of the XA leg
- D point should ideally be a 1.27 Fibonacci extension of the XA leg (for an early reversal ) or a 1.618. Scott Carney maintains the most critical number is the 1.27 XA leg.
- D point must not exceed the 2.618 extension of the XA leg.
- The Butterfly pattern must contain an AB=CD
Butterfly Pattern Trading Tips:
Bullish Butterfly example
The great thing about this pattern is that, because it indicates a high probability of a reversal at the end of a trend, you can get into a new trend much earlier than most other traders.
In fact it's quite likely that most other traders will still be trading the continuation in the CD direction, while you are taking a "contrarian" view, and taking the opposite trade.
The key thing to bear in mind about the butterfly is when it fails, it can fail quite dramatically in a continuation of the trend in the CD direction. So careful risk management in terms of a tight stop-loss is required.
Here is a good example why a close Stop-Loss is absolutely necessary. This is a bullish butterfly pattern on the Eur-Gbp 30M chart. Price has just touched a Support zone at 0.8180.
The 1.618 XA leg is at the same level - and the 2.628 of the BC leg is just a few pips lower.
This is how I traded it:
- Entry at 0.8183
- Stop at 0.8163 - 20 pips away - placing it below the Support (0.8180), and 8 pips below the bottom of the PRZ. This is also below the 1.618 XA extension of the leg and the 2.618 Fibonacci extension of the BC leg.
- Target at 0.8230
The Bat Pattern
The Bat pattern was discovered by Scott Carney in 2001. Carney maintains it is one of the most accurate patterns, and requires a smaller stop loss than most other patterns.
This is one of the retracement patterns (along with the Gartley Pattern) - and is a deep retest of Support (in the case of a bullish Bat) or Resistance (for a bearish bat) around the X level. The D level reversal will be at the .886 XA retracement in the PRZ.
If a Bat fails - it can often "morph" into a Crab Pattern where the D point exceeds the X point.
This pattern usually has an extended CD leg which is 1.27 Fibonacciextension of the AB - providing a favourable risk/reward.
Systematic tests by FxGroundworks, have shown the Bat pattern success rates to be 89%-95%.
Key features to look out for are:
- A .886 XA retracement to the D point is necessary. The D point cannot exceed the X point - if it does, then the pattern is invalid.
- Other Fibonacci levels should be closely grouped in tne PRZ
- An extended AB=CD where the CD leg is 1.27 of the AB leg. Although, an AB=CD where AB and CD are the same length is acceptable, but is a minimum for the pattern to be valid.
- Minimum 1.618 BC extension to the PRZ. Its preferable if the BC extension is 2.0. Could also be as much as 2.618.
- The B point retracement must be less than .618 to be a valid pattern. e.g. B could be 0.5 or .382 retracement of the XA.
Bat Pattern Trading Tips:
Example Bat Pattern - EUR-AUD H1
In this example, price reversed at the .886 of the XA leg precisely.
Scaling into the trade will ensure all the Fibonacci levels are tested in the PRZ. Once price has tested all the Fib levels in the PRZ, you can often expect a fast reversal, as happened in this example.
Put your Stop just above the 0.886 retracement level of the XA, for a minimum risk trade. In the example trade above, that would have worked out perfectly.
Alternatively you could place your stops above the X level, if your risk management rules permit. Above the X point will usually be a strong Support zone (for a bullish Bat) or strong Resistance zone (for a bearish Bat) - being top of a range.
I trade harmonic patterns in conjunction with strong Support and Resistance levels - and so I would look out for Bat patterns to develop near the top or bottom of a range of a higher timeframe like the H1 or H4 - since that would offer a higher probability.
The Crab Pattern
The Crab pattern was discovered by Scott Carney in 2000. Carney describes the this pattern as one of the most precise of all Harmonic Patterns.
The Crab is one of the extension patterns, (the other one being theButterfly Pattern), so, the D point exceeds the X point.
Systematic tests by FxGroundworks showed Butterfly pattern success rates to be 82.86%-90.7%.
Crab Pattern Structure:
Key features to watch out for:
- D point defined by a 1.618 Fibonacci extension of the XA
- A deep BC Fibonacci extension between 2.24-3.618.
- B point retracement to be .618 or less
This pattern can display rapid price action movement, often resulting in fast reversals at the PRZ.
The 1.618 of the XA leg and the BC extension (anywhere between 2.24-3.618) should form a reasonably tight cluster in the PRZ.
Crab Pattern Trading Tips:
Example Crab Pattern - Gold H1
In this example the 2.618 of the BC leg and the 1.618 of the XA leg are just 47 pips from each other. Price crossed through the 2.618 of the BC leg and got within 10-11 pips of the 1.618 of the XA leg, before reversing.
I always look for the PRZ to form near a significant Support or Resistance Area. And then use it if possible to place a Stop, which should also be the other side of the 1.618 of the XA leg.
In this example, there happens to be a significant Resistance level (not drawn on the chart above) at the 3.618 of the BC leg - 70 pips above current price - which would be a reasonable place to put a stop, if it fits with your trading rules for risk, of course.
Using a scaling-in entry strategy I would place limit orders in the PRZ, either side of the 1.618 with Stops 8-11 pips on the the other side of Resistance at the 3.618 extension level of the BC leg.
In this example, risk would be 72 for a reward of 200 - just under 1:3 risk/reward ratio.
I recommend the following pages for further details on harmonic patterns.
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