Different Types of Harmonic Patterns

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems. 

Why Are Harmonic Patterns Important?

Technical traders study price patterns and apply various Fibonacci ratios to determine critical points. Fibonacci retracement levels are horizontal lines that identify locations of support and resistance levels. Each level is associated with one of the Fibonacci ratios or percentages. It shows how much of a prior move the price has retraced. The direction of the previous trend is likely to continue. However, the price usually retraces to one of the Fibonacci ratios before that trend continues.

Fibonacci retracements and extensions are important harmonic trading indicators that identify support lines, identify resistance levels, place stop-loss orders, and set target prices.

What Are Different Types of Harmonic Patterns?

There are many types of harmonic patterns. The more popular harmonic patterns rely on five price points that are visualized together to define a specific geometrical structure. Parts of this structure must define specific Fibonacci ratios among the five price points. These five price points are typically represented as X, A, B, C, and D.

Popular five price point harmonic patterns include: the Gartley, the butterfly, the bat, and the shark. Each pattern includes both a bullish and a bearish version. The bullish versions identify a possible buying situation whereas the bearish versions identify a possible selling situation.

The Gartley

Both the Bullish Gartley and Bearish Gartley patterns are illustrated below.

Bullish and Bearish Gartley 

(Source: Warrior Trading)

Focusing on the Bullish Gartley pattern, initially, the price moves or swings from an initial price point X up to a second price point A. Price then corrects or retraces to B. This Bullish Gartley pattern requires that B is a 0.618 Fibonacci retracement of swing XA. In other words, B must retrace back to 61.8% of the price X.

From B, the price moves up via leg BC which is a 0.382 to 0.886 Fibonacci retracement of AB. In other words, the price C represents 38.2% to 88.6% of the price A. The next move is down via the leg CD. CD is a 1.272 to 1.618 Fibonacci extension of AB. CD is 127.2% to 161.8% of leg AB. D is also a 0.786 Fibonacci retracement of swing XA. Most harmonic patterns will reverse in direction after the CD leg. 

Here, the Bullish Gartley pattern predicts a reversal in a positive direction as illustrated by the blue “buy” arrow. This identifies a potential trade opportunity referred to as a Potential Reversal Zone (PRZ) or a Pattern Completion Zone (PCZ).

For example, point D is where a trader might consider entering a long position. Most traders will want to wait for some price action to confirm that the price is starting to rise. A stop-loss can be placed below the trader’s entry point. In the Bullish Gartley, point D is where short positions could be entered.

The Butterfly

Here we will look at the Bearish Butterfly harmonic pattern.

Bullish and Bearish Butterfly

(Source: Warrior Trading)

Reviewing the Bearish Butterfly, the price initially swings down from X to A. The up wave of leg AB is a 0.786 retracement of the XA swing. BC is a 0.382 to 0.886 retracement of AB. CD is a 1.618 to 2.24 extension of AB. D is a 1.27 – 1.618 extension of the XA swing. D — the reversal zone — is an area to consider a short trade. The Bat Let's look at a Bearish Bat example.

Bullish and Bearish Bat

(Source: Warrior Trading)

Initially, there is a drop in price via swing XA. B retraces 38.2% to 50% of XA. BC then retraces 38.2% to 88.6% of AB. CD is a 168.2% to 261.8% extension of AB. D is an 88.6% retracement of XA. D is the area to look for a short.

The Shark (Harmonic Impulse Wave)

This five-point harmonic pattern gets its name from its middle hump that looks like a shark’s dorsal fin. This pattern is also called the Harmonic Impulse Wave. The bullish pattern is provided on the left, the bearish pattern is provided on the right.

Bullish and Bearish Shark

(Source: Warrior Trading)

Conclusion

Harmonic patterns are exact in structure and exact in the relationships between price movements. This requires that the pattern show movements of a particular magnitude in order for the developing price pattern to provide an accurate reversal point. A pattern may begin to emerge that looks harmonic but if the specific Fibonacci levels do not align, the pattern will likely fail. Where the Fibonacci levels do align, patient traders can use this to their advantage to trade high probability entry and exit points.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated. Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor. Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary of Thomas Wettermann, and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.