HARMONIC PATTERNS


Harmonic Trading is a methodology that utilizes the recognition of specific structures that possess distinct and consecutive Fibonacci ratio alignments that quantify and validate harmonic patterns. These patterns calculate the Fibonacci aspects of these price structures to identify highly probable reversal points in the financial markets. This methodology assumes that harmonic patterns or cycles, like many patterns and cycles in life, continually repeat. The key is to identify these patterns and to enter or to exit a position based upon a high degree of probability that the same historic price action will occur.
Harmonic Trading is based upon the principles that govern natural and universal growthcycles. In many of life’s natural growth processes, Fibonacci numeric relationships govern the cyclical traits of development. This “natural progression” has been debated for centuries and has provided evidence that there is some order to life’s processes. When applied to thefinancial markets, this relative analysis of Fibonacci measurements can define the extent of price action with respect to natural cyclical growth limits of trading behavior. Trading behavior is defined by the extent of buying and selling and influenced by the fear or greed possessed by the market participants. Generally, price action moves in cycles that exhibit stages of growth and decline. From this perspective, the collective entityof all buyers and sellers in a particular market follow the same universal principles as other natural phenomena exhibiting cyclical growth behavior. 
YouFOREX Harmonic Ratios

In an attempt to learn the origins of this analysis, many get lost in the need to understand why these relationships exist. The basic understanding required to grasp this theory should not move beyond the simple acceptance that natural growth phenomena can be quantified by relative Fibonacci ratio measurements. Applied to the financial markets, Fibonacci ratios can quantify specific situations where repeating growth cycles of buying and selling exist. It is the understanding of these types of growth cycle structures (patterns) that provides pertinent technical information regarding price action that no other approach offers.” – Scoot M Carney. Scoot is the father of Harmonic trading and the most respectful harmonic trader I have ever known in my life. To trade the Harmonic pattern you would need to add some more Fibonacci level into the default setting.
When draw Fibonacci in mt4, it has 2 legs with 3 points. When we need an expansion/projection of AB, make sure the first point of the Fibo Expansion at A, the second at B and the third at A too. If you forget to drag the third point back to point A, your projection is COMPLETELY WRONG.
Potential Reversal Zone(PRZ): Every harmonic pattern possesses a potential reversal zone (PRZ). This zone is a place where with high probability, a reversal might take place. In the next chapters, we will discuss how to identify the PRZ for each pattern.
Potential Reversal Zone(PRZ): Every harmonic pattern possesses a potential reversal zone (PRZ). This zone is a place where with high probability, a reversal might take place. In the next chapters, we will discuss how to identify the PRZ for each pattern.
The similarity between harmonic and basic chart patterns is that, for each of them, the shape and structure are key factors to recognizing and validating a specific pattern. The next price movement can thus be projected with the goal of turning these patterns into profits. However, a key difference is that harmonic patterns are defined more precisely. They are 5point reversal structures, containing combinations of well defined consecutive Fibonacci retracements and Fibonacci extensions, leaving less room for flexible interpretation.
Harmonic patterns continuously repeat themselves, especially in consolidating markets. There are basically 2 types of patterns: 5point retracement structures like the Gartley and the Bat and 5point extension patterns like the Butterfly and the Crab. Trading harmonic patterns requires patience because, due to the specificity of the ratios, patterns that appear harmonic may not be if they don't align with the proper measurements.
Harmonic patterns continuously repeat themselves, especially in consolidating markets. There are basically 2 types of patterns: 5point retracement structures like the Gartley and the Bat and 5point extension patterns like the Butterfly and the Crab. Trading harmonic patterns requires patience because, due to the specificity of the ratios, patterns that appear harmonic may not be if they don't align with the proper measurements.
Harmonic price patterns take geometric price patterns to the next level by using Fibonacci numbers to define precise turning points. Unlike other trading methods, Harmonic trading attempts to predict future movements. This is in vast contrast to common methods that are reactionary and not predictive. Let's look at some examples of how harmonic price patterns are used to trade currencies on the forex market. (Extensions, clusters, channels and more! Discover new ways to put the "golden ratio" to work. See Advanced Fibonacci Applications.)
TUTORIAL: The Ultimate Forex Guide
Combine Geometry and Fibonacci Numbers
Harmonic trading combines patterns and math into a trading method that is precise and based on the premise that patterns repeat themselves. At the root of the methodology is the primary ratio, or some derivative of it (0.618 or 1.618). Complementing ratios include: 0.382, 0.50, 1.41, 2.0, 2.24, 2.618, 3.14 and 3.618. The primary ratio is found in almost all natural and environmental structures and events; it is also found in manmade structures. Since the pattern repeats throughout nature and within society, the ratio is also seen in the financial markets, which are affected by the environments and societies in which they trade. (Don't make these common errors when working with Fibonacci numbers  check out Top 4 Fibonacci Retracement Mistakes To Avoid.) By finding patterns of varying lengths and magnitudes, the trader can then apply Fibonacci ratios to the patterns and try to predict future movements. The trading method is largely attributed to Scott Carney, although others have contributed or found patterns and levels that enhance performance.
Issues with Harmonics
Harmonic price patterns are extremely precise, requiring the pattern to show movements of a particular magnitude in order for the unfolding of the pattern to provide an accurate reversal point. A trader may often see a pattern that looks like a harmonic pattern, but the Fibonacci levels will not align in the pattern, thus rendering the pattern unreliable in terms of the Harmonic approach. This can be an advantage, as it requires the trader to be patient and wait for ideal setups.
Harmonic patterns can gauge how long current moves will last, but they can also be used to isolate reversal points. The danger occurs when a trader takes a position in the reversal area and the pattern fails. When this happens, the trader can be caught in a trade where the trend rapidly extends against them. Therefore, as with all trading strategies, risk must be controlled.
It is important to note that patterns may exist within other patterns, and it is also possible that nonharmonic patterns may (and likely will) exist within the context of harmonic patterns. These can be used to aid in the effectiveness of the harmonic pattern and enhance entry and exit performance. Several price waves may also exist within a single harmonic wave (for instance a CD wave or AB wave). Prices are constantly gyrating; therefore, it is important to focus on the bigger picture of the time frame being traded. The fractal nature of the markets allows the theory to be applied from the smallest to largest time frames.
To use the method, a trader will benefit from a chart platform that allows the trader to plot multiple Fibonacci retracements to measure each wave.
TUTORIAL: The Ultimate Forex Guide
Combine Geometry and Fibonacci Numbers
Harmonic trading combines patterns and math into a trading method that is precise and based on the premise that patterns repeat themselves. At the root of the methodology is the primary ratio, or some derivative of it (0.618 or 1.618). Complementing ratios include: 0.382, 0.50, 1.41, 2.0, 2.24, 2.618, 3.14 and 3.618. The primary ratio is found in almost all natural and environmental structures and events; it is also found in manmade structures. Since the pattern repeats throughout nature and within society, the ratio is also seen in the financial markets, which are affected by the environments and societies in which they trade. (Don't make these common errors when working with Fibonacci numbers  check out Top 4 Fibonacci Retracement Mistakes To Avoid.) By finding patterns of varying lengths and magnitudes, the trader can then apply Fibonacci ratios to the patterns and try to predict future movements. The trading method is largely attributed to Scott Carney, although others have contributed or found patterns and levels that enhance performance.
Issues with Harmonics
Harmonic price patterns are extremely precise, requiring the pattern to show movements of a particular magnitude in order for the unfolding of the pattern to provide an accurate reversal point. A trader may often see a pattern that looks like a harmonic pattern, but the Fibonacci levels will not align in the pattern, thus rendering the pattern unreliable in terms of the Harmonic approach. This can be an advantage, as it requires the trader to be patient and wait for ideal setups.
Harmonic patterns can gauge how long current moves will last, but they can also be used to isolate reversal points. The danger occurs when a trader takes a position in the reversal area and the pattern fails. When this happens, the trader can be caught in a trade where the trend rapidly extends against them. Therefore, as with all trading strategies, risk must be controlled.
It is important to note that patterns may exist within other patterns, and it is also possible that nonharmonic patterns may (and likely will) exist within the context of harmonic patterns. These can be used to aid in the effectiveness of the harmonic pattern and enhance entry and exit performance. Several price waves may also exist within a single harmonic wave (for instance a CD wave or AB wave). Prices are constantly gyrating; therefore, it is important to focus on the bigger picture of the time frame being traded. The fractal nature of the markets allows the theory to be applied from the smallest to largest time frames.
To use the method, a trader will benefit from a chart platform that allows the trader to plot multiple Fibonacci retracements to measure each wave.
Price Forecasting with Harmonic Patterns
Harmonic patterns build on simple geometric chart patterns with the use of the Fibonacci sequence and the retracement and projection percentages that are typically associated with these numbers. Technical traders that use these patterns are looking for potential turning points after extreme trending moves are seen. But harmonic patterns are somewhat unique in that this trading approach looks to predict price movements, rather than to simply describe them.
For this reasons, harmonic patterns show some differences when compared to trend trading or the identification of overbought and oversold conditions. Many common trading methods involve simple reactions to market conditions, rather than actually attempting to predict (and project) what will happen next for the price of an asset. Here, we will look at some of the ways harmonic patterns are actively used in forex markets, and learn about some of the ways the “Divine Ratio” is actually put to use.
Looking for Repeating Price Patterns
Harmonic trading looks for patterns in price activity and positions are initiated based on the idea that certain types of patterns repeat themselves over time. The foundations of these patterns come from the 0.618 (or 1.618) ratio and its complementary Fibonacci ratios, which can be found in common retracement and projection analysis. The logic behind these applied ratios comes from the idea that the 0.618 ratio is common throughout nature and the universe and can even be found in structures that were made by human beings (unintentionally).
The prevalence of this ratio suggests that these measurements will apply to the financial markets as well, as these markets are a small part of a universal whole. In identifying price patterns of differing lengths and magnitudes, traders can use Fibonacci ratios to plot potential turning points. It is in these areas that actual trades are taken. The “Father” of the harmonic trading approach is considered to be H.M. Gartley but his foundational work did not actually use Fibonacci ratios in his analysis. In later years, Scott Carney has done major work to develop this form of analysis and many of the price patterns currently used are attributed to Carney.
Difficulties When Trading with Harmonics
The textbook structures for harmonic patterns are very precise, and require prices to unfold in movements of a set magnitude in order to signal a reversal point and trigger an actual trade. There will be many instances where traders might see a pattern that resembles one of the harmonic structures but if the Fibonacci measurements do not align with the predetermined requirements for the pattern, the structure is not valid. This essentially means that the shape itself is not enough (as it might be with a head and shoulders or flag pattern), to actually generate a trading signal. At the same time, however, this can be viewed as a positive as it takes out an element of subjectivity and can enhance the validity (and eventual accuracy) of the trading signals that are sent.
Structures Within Structures
One of the accepted strengths of harmonic patterns is that they give traders an indication of how long impulsive waves will last, in addition to the price points where the moves will occur. But the major trading difficulties are seen when the reversal area fails to catch prices and they continue in their original direction. This possibility always exists, and this is dangerous because harmonic patterns pick up extreme moves where price gaps can easily be seen. In this way, it can be more difficult to control risk when dealing with these patterns (despite the limited stop losses that are typically used).
Another factor to consider is that patterns can (and often will) exist inside other patterns. Multiple (smaller) price waves can be seen within a single (larger price wave), and this can go far to complicate and confuse the analysis. This can occur because of the fractal nature of harmonic analysis. Larger time frames tend to be viewed as being more reliable but it is preferable to see all of the available signals move in agreement.
It is also possible to see nonharmonic patterns inside the harmonic area and these patterns might show conflicting signals. But in cases where these patterns do agree (such as a reverse head and shoulders, and a bullish Crab pattern), this can offer an added level of validity to the signal.
Harmonic patterns build on simple geometric chart patterns with the use of the Fibonacci sequence and the retracement and projection percentages that are typically associated with these numbers. Technical traders that use these patterns are looking for potential turning points after extreme trending moves are seen. But harmonic patterns are somewhat unique in that this trading approach looks to predict price movements, rather than to simply describe them.
For this reasons, harmonic patterns show some differences when compared to trend trading or the identification of overbought and oversold conditions. Many common trading methods involve simple reactions to market conditions, rather than actually attempting to predict (and project) what will happen next for the price of an asset. Here, we will look at some of the ways harmonic patterns are actively used in forex markets, and learn about some of the ways the “Divine Ratio” is actually put to use.
Looking for Repeating Price Patterns
Harmonic trading looks for patterns in price activity and positions are initiated based on the idea that certain types of patterns repeat themselves over time. The foundations of these patterns come from the 0.618 (or 1.618) ratio and its complementary Fibonacci ratios, which can be found in common retracement and projection analysis. The logic behind these applied ratios comes from the idea that the 0.618 ratio is common throughout nature and the universe and can even be found in structures that were made by human beings (unintentionally).
The prevalence of this ratio suggests that these measurements will apply to the financial markets as well, as these markets are a small part of a universal whole. In identifying price patterns of differing lengths and magnitudes, traders can use Fibonacci ratios to plot potential turning points. It is in these areas that actual trades are taken. The “Father” of the harmonic trading approach is considered to be H.M. Gartley but his foundational work did not actually use Fibonacci ratios in his analysis. In later years, Scott Carney has done major work to develop this form of analysis and many of the price patterns currently used are attributed to Carney.
Difficulties When Trading with Harmonics
The textbook structures for harmonic patterns are very precise, and require prices to unfold in movements of a set magnitude in order to signal a reversal point and trigger an actual trade. There will be many instances where traders might see a pattern that resembles one of the harmonic structures but if the Fibonacci measurements do not align with the predetermined requirements for the pattern, the structure is not valid. This essentially means that the shape itself is not enough (as it might be with a head and shoulders or flag pattern), to actually generate a trading signal. At the same time, however, this can be viewed as a positive as it takes out an element of subjectivity and can enhance the validity (and eventual accuracy) of the trading signals that are sent.
Structures Within Structures
One of the accepted strengths of harmonic patterns is that they give traders an indication of how long impulsive waves will last, in addition to the price points where the moves will occur. But the major trading difficulties are seen when the reversal area fails to catch prices and they continue in their original direction. This possibility always exists, and this is dangerous because harmonic patterns pick up extreme moves where price gaps can easily be seen. In this way, it can be more difficult to control risk when dealing with these patterns (despite the limited stop losses that are typically used).
Another factor to consider is that patterns can (and often will) exist inside other patterns. Multiple (smaller) price waves can be seen within a single (larger price wave), and this can go far to complicate and confuse the analysis. This can occur because of the fractal nature of harmonic analysis. Larger time frames tend to be viewed as being more reliable but it is preferable to see all of the available signals move in agreement.
It is also possible to see nonharmonic patterns inside the harmonic area and these patterns might show conflicting signals. But in cases where these patterns do agree (such as a reverse head and shoulders, and a bullish Crab pattern), this can offer an added level of validity to the signal.
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FineTuning Entries and Stops
Each pattern provides a PRZ. This is not an exact level, as two measurements  extension or retracement of XA  creates one level at D and the extension of BC creates another level at D. This actually makes D a zone where reversals are likely. Traders will also notice that BC can have differing extension lengths. Therefore, traders must be aware of how far a BC extension may go. If all projected levels are within close proximity, the trader can enter a position at any area. If the zone is spread out, such as on longerterm charts where the levels may be 50 pips or more apart, it is important to wait to see if the price reaches further extension levels of BC before entering a trade.
Stops can be placed outside the largest potential extension of BC. In the crab pattern, for example, this would be 3.618. If the rate reversed before 3.618 was hit, the stop would be moved to just outside the closed Fibonacci level to the rate low (bullish pattern) or rate high (bearish pattern) in the PRZ.
The price touches almost exactly the 1.618 extension level of XA at 1.4892 and the extension of BC to 2.618 is very close at 1.4887 (there are two Fibonacci tools used, one for each wave). This creates a very small PRZ, but it may not always be the case. Entry is taken after the rate enters the zone and then begins to retreat. The stop is placed just outside the most significant level that was not reached by the rate, in this case a few pips above the 1.618 XA extension. Targets can be based on support levels within the pattern; therefore, an initial profit target would be just above point B. (Crowd psychology is the reason this technique works. Find out how to make it work for you. To learn more, refer to Candlesticks Light The Way To Logical Trading.)
The Bottom Line
Harmonic trading is a precise and mathematical way to trade, but it requires patience, practice and a lot of study to master the patterns. Movements that do not align with proper pattern measurements invalidate a pattern and can lead traders astray. The Gartley, butterfly, bat and crab are the betterknown patterns that traders can watch for. Entries are made in the potential reversal zone when price confirmation indicates a reversal, and stops are placed outside the nearest significant (for the pattern) Fibonacci level that was not hit by the BC or XA extensions/retracements into the D (PRZ) area. (All trading platforms have benefits and drawbacks  master the fake trade before making a real one. Check out Forex: Demo Before You Dive In.)
The benefits and the disadvantages of the harmonic patterns trading
The list of Benefits:
1. Method offers excellent Reward:Risk ratio.
2. Leading indicator, projects future price move direction in advance.
3. Used on any Forex pair or market
4. Used on any timeframe
5. News independent
6. Well defined price patterns structures
7. Help to see kind of order in the market
8. High probability setups
9. Clearly defined pattern invalidation level (important for SL placement)
10. point D is the market decision point. Price will move strongly from D, or in the direction indicated by the pattern, or opposite (pattern failure). Anyway, it's high probability to have a strong move.
11. HT method is easy to combine with other trading methods (Elliott Wave theory, Pivot points, MACD, Stochastic, RSI, divergences, volume, Supply/Demand, candlestick formations, cycles and timing methods, grid and various money management techniques)
12. Perfectly fits to the traders law: "Buy low, sell high".
13. Trend reversal forecasting capability
14. Technical, mechanical method, can be programmed, automatized. Free and commercial indicators available.
15. Combines price patterns with Fibonacci ratios.
16. Harmonic patterns occur frequently.
17. Harmonic patterns usually create a very tight potential trade area.
The list of Disadvantages of Harmonic Trading:
1. Clear rules for entry and SL level, so easy to manipulate and take traders SLs before the run in proper pattern direction
2. Too many patterns everywhere, difficult to focus on quality and highest probability ones
3. Possibility to have conflicting signals from different timeframes
4. Very technical
5. Requires time and experience to build Fibonacci clusters and measure swings relations
6. Identify good pattern location
7. Predicting when a pattern/swing extension will happen
8. Harmonic patterns are often described in www materials and books as Price relations between swings, but no Time rules are defined nor provided.
9. Many patterns fail, and/or morph into another pattern.
10. Risk / Stop Loss levels are much better defined than Take Profit levels.
11. People invent new patterns and pattern names, without proper understanding of the nature of the HT and HT patterns.
12. Too many Fibonacci ratios, not easy to locate the PRZ.
13. Too many Fibonacci ratios, mass on the chart after applying all of them.
14. Price retraces outside of the PRZ when Time factor or pattern location is not used properly.
15. Internet flooded with "HT creatures"
16. Trading trainers choose Harmonic Trading as it's easy to talk loooong hours and days about Fibonacci, ratios, patterns, PRZ, etc, etc.
17. Low quality harmonic patterns indicators on the www, commonly used by newbes.
The list of Benefits:
1. Method offers excellent Reward:Risk ratio.
2. Leading indicator, projects future price move direction in advance.
3. Used on any Forex pair or market
4. Used on any timeframe
5. News independent
6. Well defined price patterns structures
7. Help to see kind of order in the market
8. High probability setups
9. Clearly defined pattern invalidation level (important for SL placement)
10. point D is the market decision point. Price will move strongly from D, or in the direction indicated by the pattern, or opposite (pattern failure). Anyway, it's high probability to have a strong move.
11. HT method is easy to combine with other trading methods (Elliott Wave theory, Pivot points, MACD, Stochastic, RSI, divergences, volume, Supply/Demand, candlestick formations, cycles and timing methods, grid and various money management techniques)
12. Perfectly fits to the traders law: "Buy low, sell high".
13. Trend reversal forecasting capability
14. Technical, mechanical method, can be programmed, automatized. Free and commercial indicators available.
15. Combines price patterns with Fibonacci ratios.
16. Harmonic patterns occur frequently.
17. Harmonic patterns usually create a very tight potential trade area.
The list of Disadvantages of Harmonic Trading:
1. Clear rules for entry and SL level, so easy to manipulate and take traders SLs before the run in proper pattern direction
2. Too many patterns everywhere, difficult to focus on quality and highest probability ones
3. Possibility to have conflicting signals from different timeframes
4. Very technical
5. Requires time and experience to build Fibonacci clusters and measure swings relations
6. Identify good pattern location
7. Predicting when a pattern/swing extension will happen
8. Harmonic patterns are often described in www materials and books as Price relations between swings, but no Time rules are defined nor provided.
9. Many patterns fail, and/or morph into another pattern.
10. Risk / Stop Loss levels are much better defined than Take Profit levels.
11. People invent new patterns and pattern names, without proper understanding of the nature of the HT and HT patterns.
12. Too many Fibonacci ratios, not easy to locate the PRZ.
13. Too many Fibonacci ratios, mass on the chart after applying all of them.
14. Price retraces outside of the PRZ when Time factor or pattern location is not used properly.
15. Internet flooded with "HT creatures"
16. Trading trainers choose Harmonic Trading as it's easy to talk loooong hours and days about Fibonacci, ratios, patterns, PRZ, etc, etc.
17. Low quality harmonic patterns indicators on the www, commonly used by newbes.