Harmonic patterns are incredibly valuable in trading the financial markets. Whether you are trading currency pairs, stocks or commodities, all these financial markets are non-linear.
The Basic Principles of Harmonic Trade Patterns
This means that instead of predicting the prices, non-linear systems require the trader to only formulate probable outcomes. In other words, no financial market or asset lets you completely and accurately predict prices. That is why trading is really a business of forecasting because the markets are entirely uncertain.
Harmonic patterns help to ease out some of that uncertainty in the financial markets. This particular pattern works hand in hand with the Fibonacci sequence of numbers to form a pattern that repeats itself and is reflected in the financial market. The Fibonacci sequence is found in most natural and man-made objects and events. The harmonic pattern is a representation of this numerical sequence and it repeats itself in virtually everything, including in the financial markets.
A trader can therefore forecast the price movement of an asset by identifying harmonic patterns with different sizes and lengths and applying the Fibonacci sequence of numbers to these patterns. The essence of this is that traders use numbers and patterns that occur in nature to trade the financial markets, which are affected by both man-made and natural events.
How are harmonic patterns applied in trading?
As mentioned, the underlying principle behind the harmonic trading pattern is that trading patterns are repetitive. When trading using harmonic patterns, the main requirement is to identify when the pattern forms and then you enter or exit a market position if there is a strong probability that the same price movement will happen again. Although harmonic patterns are the not completely accurate, they can be helpful in identifying profitable opportunities with minimal risk.
When trading on this particular pattern, it is important to note that price movements are not disparate or disconnected. Each price move is in fact connected to the next. Also, the patterns of price movements are usually connected to exact Fibonacci ratios. This connection helps to identify possible price reversals, allowing you to trade at an advantageous price point. By now, it is clear that this trading method leverages the natural harmony of the market to execute profitable trades and to alleviate losses as much as is possible.
Harmonic patterns are particularly effective at identifying trades that can be profitably executed at the height of a price reversal. Just as these patterns can be applied on any financial market, traders can also use them on any time frame whether that’s daily, weekly or monthly. The best trade opportunities typically occur on daily charts but monthly or weekly charts are great for analyzing historical trends and for planning long-term trades.
Harmonic trading patterns are aligned to specific mathematical and natural conditions. Just like in nature, the price movements as represented by the patterns are quantifiable using Fibonacci ratios, which are then used in technical analysis. As such, traders will benefit by executing trades where the market’s natural rhythm starts to reverse.
At the root of this pattern is the primary Fibonacci ratio: 0.618 or 1.618. Also complementary ratio can be applied as 0.382, 0.50, 1.41, 2.0, 2.24, 2.618, 3.14, 3.618. This ratio is found in any financial market so every trader can apply this Fibonacci ratio to predict every future movements.
What types of Harmonic Patterns?
There are many types of harmonic patterns but 4 seems most populars: Butterfly, Gartley, Bat and Crab patterns
THE BUTTERFLY PATTERN
THE GARTLEY PATTERN
THE BAT PATTERN
THE CRAB PATTERN