Harmonic patterns in the trading realm have been studied and analyzed extensively by various scholar over time.
The patterns spark the interest of stakeholders in the industry because of their efficiency and accuracy. The patterns rely heavily on the price action movements but they are complemented by Fibonacci measurements. Scott M. Carney came up with a number of patterns which are crucial for identifying various signals in the markets. Let us look at the patterns from the perspective of this author.
Trading with Harmonic patterns
The idea of trading with harmonic patterns came as a result of the work of H.M Gartley. This author extensively described the “222” pattern. The pattern is one of the most commonly known harmonic trading patterns and it is referred to as the Gartley Pattern. Identifying this pattern in the markets is very easy. It is usually seen as a bearish M or bullish W. Such a pattern appears every time there is a correction of an underlying uptrend or downtrend. Various retracement levels can be identified in a full Gartley pattern.
Harmonic patterns in the market
The Gartley pattern has not only received popular use in the markets, but it has also been adopted by traders in various ways. With time, this pattern has evolved to be interpreted in different ways and variations. The basic premise of all variations of the pattern is the establishment of specific patterns which can be observed to be in a cyclical occurrence. When a trader has identified the manner and time when the cycles repeat themselves, then they can be able to clearly mark areas where they can enter or exit the trade. There is a high level of risk elimination with the harmonic patterns, cited at being 80% on average.
Types of harmonic patterns
The fundamental basis of any harmonic pattern is the price structure in the market. By plotting the prices alongside various Fibonacci retracements and projections, it is possible to come up with patterns that exhibit turning points in the market. The main harmonic patterns that have been identified are:
- The Shark Pattern
- AB=CD Pattern
- The Crab Pattern
- The Bat Pattern
- The Butterfly Pattern
- The Cypher Pattern
The Shark, Crab and Bat patterns basically feature the bearish W pattern. The difference between these patterns is extreme limits. The Crab features the most extended potential reversal zone (PRZ). The extreme projection typically indicates fast reversals which are common with this pattern. The Bat pattern, on the other hand, is a pretty accurate pattern. It typically shows a clear PRZ. Finally, the Shark pattern has swing or pivot points which are cast on a 5-0 pattern.
The AB=CD, Butterfly and Cypher patterns are all bullish and they feature the M pattern. The AB=CD pattern is, however, a 4-point structure which shows the distances as depicted by price action. The Butterfly is ideally a pattern that features different Fibonacci measurements. Finally, the Cypher is another 4-leg structure which is more uncommon but still a likely pattern in harmonic analysis and trade.
How to easily apply harmonic patterns to day trading
Harmonic trading is known by many traders to be complex and tasking. This is so because of the extensive use of logic and Fibonacci numbers. They can, however, account for up to 70% accuracy when trading. For a trader to succeed with this trading strategy, there needs to be a proper understanding of the principles. The best way to fully grasp harmonic patterns is by analyzing the works of Scott M. Carney. Other than that, the various harmonic indicators in the market come with their own set of rules which must be studied and understood.
The various works published by Scott M. Carney go to great details on how the harmonic patterns can be used in trade. Harmonic trading is one of the most accurate forms of identifying market entry and exit points. Like other trading methods though, quite a number of risks can be expected when using harmonics to trade. The most important factor that should be considered by all traders who want to succeed in the market is diligence. The different patterns that can be observed by harmonics provide different insights which should be used for specific purposes. Risk management is also an important topic that must be studied by all traders using harmonics to trade.