Harmonic Patterns

What Are Harmonic Patterns?

Harmonic Trading is a methodology that utilizes the recognition of specific price patterns and the alignment of exact Fibonacci ratios to determine highly probable reversal points in financial price charts. This methodology assumes that trading patterns or cycles adhere to natural harmonic mathematical ratios and repeat themselves, sometimes in a fractal nature. Once these patterns are identified, they can be used to enter or exit trading positions with very high degrees of accuracy. Although, harmonic patterns are not 100% accurate and sometimes fail, they have been historically affirmed as some of the most highly precise patterns to trade. The most comprehensive references to Harmonic Trading are outlined in the following books:

1. Profits in the Stock Market – H.M. Gartley
2. Fibonacci Ratios with Pattern Recognition – Larry Pesavento
3. Trade What You See: How to Profit from Pattern Recognition – Larry Pesavento
4. The Gartley Trading Method: New Techniques to Profit from the Markets Most Powerful Formation – Ross Beck
5. Harmonic Trading: Volume One, Volume Two – Scott M. Carney
6. Trade Chart Patterns like the Pros – Suri Dudella

Below is a Visual Reference Guide to Identifying Specific Harmonic Patterns

1. Starting at point X:
    –  The lowest or highest point in the pattern (depending on Bullish or Bearish).
    –  Usually a significant major high or low on a chart. (sometimes a capitulation High or Low with heavy volume)

2. Then identify a swing level high/low A.
    –  The move from X to A is the first move contra the previous trend.
    –  This move is going to be the primary basis for the macro pattern identification.

3. Identify & Measure B Retracement.
    –  The move from A to B is in the direction of the macro trend and is the most critical point in most patterns for projecting the final D point.
    –  (D=Potential Reversal Zone).

Using the Visual References note that the grey dashed lines that connect two points represent the level of retracement in % terms. Example for Bullish Gartley: B point is 61.8% retracement downward from the previous move of X to A. Point C is then either 38.2% or 88.6% retracement of prior down move of A to B. Then D would then be projected 113.0% or 161.8% downward from point C, using the length of B to C for the base length to be projected.

4. The last projected move D is the final and key point that we are trying to project for the potential reversal zone.
    –  The prior point B as stated before is most critical because serving as a reference point in space, level D is then projected using key Fibonacci levels.
    –  Additionally, the projected levels from D are also lined up with key retracements from the X-A move thus creating a precise parallax view point that projects an exact turning point from two previous reaction zones.

 *It is also key to note that a distinct AB=CD patterns do form in variations of these patterns. The simple Harmonic AB=CD and ALT AB=CD 4 point patterns do appear independently from 5 point patterns as well. Additionally, the Three Drives pattern is a obscure harmonic pattern that exists as well. For all these harmonic patterns, the point is to wait for the entire pattern to complete before taking any short or long trades.

*When I trade these patterns I do not see D as an area to blindly just place buy or sell orders, but I look for key reversal bars/candlesticks as well as other technical indicators to provide further catalyst for trade execution. And I always use a stop loss order.