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.

Long Stock
Outlook: Bullish
Directional Risk: Purchase Price of Stock.
Max gain: Unlimited upside.
Max loss: Purchase price.
Breakeven: Purchase price + commissions.

Short Stock
Outlook: Bearish.
Directional Risk: Limited upside.
Max gain: Initial credit.
Max loss: Unlimited.
Breakeven: Sale price + commissions.

Long Call
Outlook: Bullish.
Directional Risk: Limited downside.
Max gain: Unlimited upside.
Max loss: Premium (amount paid). Occurs if stock closes below strike price + premum paid at expiration.
Breakeven: Strike price + premium.
Synthetic option equivalent: Long stock Long put

Short Call
Outlook: Neutral to slightly bearish.
Directional Risk: Limited upside.
Max gain: Premium – Commissions (initial credit). Occurs if stock closes below strike price at expiration.
Max loss: Unlimited.
Breakeven: Strike price premium.

Long Put
Outlook: Bearish
Directional Risk: Limited upside.
Max gain: Occurs at a stock price of zero.
Max loss: Premium + Commissions (amount paid). Occurs if stock closes above strike price at expiration.
Breakeven: Strike price – premium.

Short Put
Outlook: Neutral to slightly bullish
Directional Risk: Limited downside.
Max gain: Premium – Commissions (initial credit). Occurs if stock closes above strike at expiration.
Max loss: Strike price – premium. Occurs at a stock price of zero.
Breakeven: Strike price – premium.
Synthetic equivalent: Long stock Short call (covered call).

Long Straddle
Position: Long call long put with same strike and time to expiration.
Outlook: (1) Extremely bullish or bearish but unsure of direction or
(2) Expecting an increase in implied volatility.
Directional Risk: None.
Max gain: Unlimited upside and Limited downside.
Max loss: Premiums paid for both options. Occurs if stock closes at strike price at expiration.
Breakeven (2 breakeven points):
Upper: Strike price call + put premium + commissions. Lower: Strike price – call + put premiums + commisions.

Short Straddle
Position: Short call short put with same strike and time to expiration.
Outlook: (1) Overall neutral outlook but can also be slightly bullish or slightly bearish if credit is large enough or (2) Expecting a decrease in implied volatility.
Directional Risk: Unlimited upside and Limited downside.
Max gain: Premiums received from both options. Occurs if stock closes at strike price at expiration.
Max loss: Unlimited.
Breakeven (2 breakeven points):
Upper: Strike price + Straddle price + commissions.
Lower: Strike price – Straddle price + commissions.

Long Strip
Position: Buy 2 puts and buy 1 call with same strike and time to expiration.
Outlook: (1) Extremely bullish or bearish but favoring bearish or
(2) Expecting an increase in implied volatility.
Directional Risk: None.
Max gain: Unlimited upside and Limited downside.
Max loss: Premiums paid for all options + commissions. Occurs if stock closes at strike price at expiration.
Breakeven (2 breakeven points):
Upper: Strike price + price paid of 3 options.
Lower: Strike price – price paid of 3 options.

Short Strip
Position: Sell 2 puts and sell 1 call with same strike and time to expiration.
Outlook: (1) Neutral to slightly bullish or bearish but more fearful of upward move or (2) Expecting a decrease in implied volatility.
Directional Risk: Unlimited upside and downside.
Max gain: Premiums received for all options. Occurs if stock closes at strike price at expiration.
Max loss: Unlimited upside and downside.
Breakeven (2 breakeven points):
Upper: Strike price call and put premiums
Lower: Strike price – half the call and put premiums

Long Strap
Position: Buy 2 calls and buy 1 put with same strike and time to expiration.
Outlook: (1) Extremely bullish or bearish but favoring bullish or
(2) Expecting an increase in implied volatility.
Directional Risk: None.
Max gain: Unlimited.
Max loss: Premiums paid for all options. Occurs if stock closes at strike price at expiration.
Breakeven (2 breakeven points):
Upper: Strike price half the call and put premiums. Lower:Strike price – the call and put premiums.

Short Strap
Position: Sell 2 calls and sell 1 put with same strike and time to expiration.
Outlook: (1) Neutral to slightly bullish or slightly bearish but more fearful of the downside or (2) Expecting a decrease in implied volatility.
Directional Risk: Unlimited upside and downside.
Max gain: Premiums received for all options. Occurs if stock closes at strike price at expiration.
Max loss: Unlimited upside and downside.
Breakeven (2 breakeven points):
Upper: Strike price half the call and put premiums.
Lower: Strike price – the call and put premiums.

Long Strangle
Position: Buy 1 low strike put and buy 1 high strike call.
Outlook: (1) Extremely bullish or bearish but uncertain of direction or
(2) Expecting an increase in implied volatility.
Directional Risk: None.
Max gain: Unlimited upside and downside.
Max loss: Premiums paid for both options. Occurs if stock stays between strikes at expiration.
Breakeven (2 breakeven points):
Upper: Call strike call and put premiums.
Lower: Put strike – call and put premiums.

Short Strangle
Position: Sell 1 low strike put and sell 1 high strike call.
Outlook: Neutral to slightly bullish or slightly bearish.
Directional Risk: Unlimited upside and downside.
Max gain: Premiums received from both options. Occurs if stock closes between strikes at expiration.
Max loss: Unlimited upside and downside.
Breakeven: (2 breakeven points):
Upper: Call strike call and put premiums.
Lower: Put strike – call and put premiums.

Covered Call (Buy-Write)
Position: Buy stock and sell calls (equivalent contract amounts) against it.
Outlook: Neutral to slightly bullish.
Directional Risk: Unlimited downside.
Max gain: (2 possible)
(1) Time premium received from calls (occurs if call strike is less than or equal to stock purchase price). 
(2) Time premium received plus capital gain (occurs if call strike is higher than stock purchase price). Regardless of which strike is sold, the maximum gain occurs if the stock price is greater than the strike price at expiration.
Max loss: Stock price less the premium received from call (net cost to purchase the stock). Occurs at a stock price of zero.
Breakeven: Stock price less premium received.

Covered Put (Sell-Write)
Position: Short stock and sell puts (equivalent contract amounts) against it.
Outlook: Neutral to slightly bearish (may be slightly bullish is premium is big enough).
Directional Risk: Unlimited upside.
Max gain:
(1) Time premium received from puts (
occurs if stock price is less than or equal to the put strike at expiration). (2) Time premium received plus capital gain (occurs if call strike is lower than stock short sale price). 
Regardless of which strike is sold, the maximum gain occurs if the stock price is less than the strike price at expiration.
Max loss: Unlimited upside
Breakeven:
Short sale price plus put option premium received.

Bull Spread
Position (Usually done with either all calls or all puts):
Calls (debit spread): Buy a low strike call and sell a higher strike call.
Puts (credit spread): Sell a high strike put and buy a lower strike put.
(Whether using calls or puts, you are always buying the low strike and selling the high strike.)
Outlook:Neutral to moderately bullish depending on how constructed.
Directional Risk: Limited downside.
Max gain:Calls: Difference in strike prices less debit.
Puts: Credit received
Regardless of whether call or puts are used, the max gain occurs if the stock price is greater than the higher strike price at expiration.
Max loss:Calls: Premium paid.
Puts: Difference in strikes less premium received.
Whether using calls or puts, the max loss occurs if the stock price is below the lower strike price at expiration.
Breakeven:Calls: Long call strike plus debit.
Puts: Credit received
Regardless of whether call or puts are used, the max gain occurs if the stock price is greater than the higher strike price at expiration.
Max loss:
Calls: Premium paid.
Whether using calls or puts, the max loss occurs if the stock price is below the lower strike price at expiration.
Breakeven:Calls: Long call strike plus debit.
Puts: High strike put less premium received. 

Bear Spread
Position (usually done with either all calls or all puts):
Calls (credit spread): Sell a low strike call and buy a higher strike call.
Puts: (debit spread): Buy high strike put and sell a lower strike put.
Outlook:Neutral to moderately bearish depending on how constructed.
Directional Risk: Limited upside.
Max gain: Calls: Credit received.
Puts: Difference in strike prices less debit.
Max loss:Calls: Difference in strikes less premium received.
Puts: Premium paid
Whether using calls or puts, the max loss occurs if the stock price is greater than the higher strike at expiration.
Breakeven:Calls: Short call strike plus premium received.
Puts: High strike put less premium received.

Long Butterfly Spread
Position (usually done with either all calls or all puts):
Calls or Puts: Buy 1 low strike option, sell 2 medium strikes, and buy 1 high strike. All strikes should be equally spaced with same time to expiration.
Outlook: (1) Neutral but can be slightly bullish or slightly bearish depending on how constructed or (2) Expecting a rise in the skew curve.
Directional Risk: Limited upside and downside.
Max gain: Difference in middle strikes and one of the end strikes (also called the “wings”) less premium paid. Occurs if stock price equals center strike price at expiration.
Max loss: Premium paid. Occurs if stock closes above or below outer strikes (also called the “wings”) at expiration.
Breakeven (2 breakeven points):
Lower: Low strike premium
Upper: High strike – premium

Short Butterfly Spread
Position (usually done with either all calls or all puts):
Calls or Puts: Sell 1 low strike option, buy 2 medium strikes, and sell 1 high strike. All strikes should be equally spaced with same time to expiration.
Outlook: (1) Moderately bullish or bearish or (2) Expecting a fall in the skew curve
Directional Risk: None.
Max gain: Premium received. Occurs if the stock price is less than the lower strike or greater than the highest strike at expiration.
Max loss: Difference in middle strikes and end strikes (also called the “wings”) less premium paid. Occurs if stock closes at center strike price at expiration.
Breakeven (2 breakeven points):
Lower: Low strike premium
Upper: High strike – premium

Long Condor Spread
Position (usually done with either all calls or all puts):
Calls or Puts: Buy 1 low strike option, sell 2 successively higher strikes, and buy 1 at an even higher strike. All strikes should be equally spaced with same time to expiration.Outlook: Neutral to slightly bullish or bearish depending on how constructed or (2) Expecting a rise in the skew curve.
Directional Risk: None.
Max gain: Difference in two middle strikes (or any two successive strikes) less premium paid. Occurs if stock closes between middle strike prices at expiration.
Max loss: Premium paid.
Breakeven (2 breakeven points):
Lower: Low strike premium
Upper: High strike – premium

Short Condor Spread
Position (usually done with either all calls or all puts).
Calls or Puts: Sell 1 low strike option, buy 2 successively higher strikes, and sell 1 higher strike.
All strikes should be equally spaced with same time to expiration.
Outlook: Moderately bullish or bearish depending on how constructed or (2) Expecting a fall in the skew curve.
Directional Risk: None.
Max gain: Premium received. Occurs if the stock price is less than the lowest strike or greater than the highest strike at expiration.
Max loss: Difference in two successive strikes less premium received. Occurs if the stock price is between the two middle strikes at expiration.
Breakeven (2 breakeven points):
Lower: Low strike premium
Upper: High strike – premium

Long Albatross Spread
Position (usually done with either all calls or all puts).
Calls or Puts: Buy 1 low strike option, sell 1 higher strike, skip a strike and sell the next higher strike, and buy 1 higher strike. All strikes should be equally spaced with same time to expiration.
Outlook: Neutral to moderately bullish or bearish depending on how constructed.
Directional Risk: Limited upside and downside.
Max gain: Difference in first two (or last two strikes) less premium paid. Occurs if stock price is less than the lowest strike or greater than the highest strike at expiration.
Max loss: Premium paid.
Breakeven (2 breakeven points):
Lower: Low strike premium
Upper: High strike – premium

Short Alabatross Spread
Position (usually done with either all calls or all puts).
Calls or Puts: Sell 1 low strike option, buy 1 higher strike, skip a strike and buy the next higher strike, and sell 1 higher strike. All strikes should be equally spaced with same time to expiration.
Outlook: (1) Extremely bullish or bearish or (2) Expecting a fall in the skew curve.
Directional Risk: None.
Max gain: Credit received.
Max loss: Difference in two lowest (or two highest) strikes less premium. Occurs if the stock price
is between the two center strikes at expiration.
Breakeven (2 breakeven points):
Lower: Low strike premium
Upper: High strike – premium

Call Backspread (Long Call Ratio Spread)
Position: Short low strike call and long more contracts of a higher strike call.
Outlook: Extremely bullish but also fearful of a downside move.
Directional Risk: Limited downside if debit spread (none if credit spread).
Max gain: Unlimited.
Max loss: Per spread, the maximum loss is the difference in strikes the debit amount (or minus the credit if trade executed for a credit). Occurs if the stock price equals the strike price of the long calls.
Breakeven (2 possible breakeven points):
If trade executed for a debit there is one breakeven point:
Long call strike 1/(R-1) * max loss; where R is the ratio of long calls to short calls (R must be 2 or greater).
If trade executed for a credit, there will be two breakeven points:
Lower: Short strike plus credit.
Upper: Same calculation is used as for debit spread

Short Call Ratio Spread
Position: Long low strike price call and short more contracts of a higher strike call.
Outlook: Slightly bullish but fearful of downturn.
Directional Risk: Unlimited upside. Limited downside if debit spread (none if credit spread).
Max gain: Limited. Occurs if the stock price equals the strike of the short calls at expiration. The max gain is the difference in strikes less the debit paid (or plus the credit received).
Max loss: Unlimited upside.
Breakeven (2 possible breakeven points):
If trade executed for a credit, there is one breakeven point: Short call strike 1/(R-1) * max gain; where R is the ratio of short calls to long calls (R must be greater than 2).
If trade executed for a debit there will be two breakeven points:
Lower: Strike of the short call debit
Upper: Same calculation is used as for credit spread
The formula for the lower breakeven will not change regardless of the number of short calls. This is because the slope of the profit and loss chart is only affected to the right (upper breakeven) of the short strike as shown in the profit and loss diagram above.

Put Backspread (Long Put Ratio Spread)
Position: Short a high strike put and long more contracts of a lower strike put.
Outlook: Extremely bearish but fearful of an upward move.
Directional Risk: Limited upside if debit spread (none if credit spread).
Max gain: Strike price of the long less debit (or plus credit). Occurs at a stock price of zero.
Max loss: Limited. Occurs if the stock price equals the strike of the long position at expiration.
Max loss is difference in strikes plus the debit amount (or less the credit amount).
Breakeven (2 possible breakeven points):
If trade executed for a debit, there is one breakeven point: Long put strike – 1/(R-1) * max loss; where R is the ratio of long puts to short puts (R must be greater than or equal to 2).
If trade executed for a credit, there will be two breakeven points:
Lower: Same calculation is used as for debit spread
Upper: Short strike – credit

Short Put Ratio Spread
Position: Long a high strike put and short more contracts of a lower strike put.
Outlook: Neutral to slightly bearish but fearful of upward move.
Directional Risk: Unlimited downside
Max gain: Limited. Occurs if the stock price equals the strike of the short puts at expiration. Max gain is difference in strike less debit (or plus credit).
Max loss: Max loss is difference in strikes plus the debit amount (or less the credit amount).
Breakeven (2 possible breakeven points):
If trade executed for a credit, there is one breakeven point: Short put strike – 1/(R-1) * max gain; where R is the ratio of short puts to long puts (R must be 2 or greater). Example: Buy 1 $50 put for $3 and sell 2 $45 puts for $2 for net credit of $1. There are twice as many puts purchased so R = 2. Because the max gain is $6, the breakeven is $45 – 1/(2-1) * $6 = $39.
If trade executed for a debit, there will be two breakeven points:
Lower: Same calculation is used as for credit spread
Upper: Long strike – debit

Long Call Christmas Tree
Position: Short 1 lower strike call and long 1 contract of a higher strike call and long 1 more call at an even higher strike.
Outlook: Extremely bullish but fearful of a downward fall.
Directional Risk: Limited downside if debit spread (none if credit spread).
Max gain: Unlimited upside.
Max loss: Limited. Occurs if stock closes between strikes of two long positions at expiration.
If executed for credit: Max loss is difference between short strike and first long strike minus credit.
If executed for debit: Max loss is difference between short strike and first long strike plus debit.
Breakeven (2 possible breakeven points):
If trade executed for a debit, there is one breakeven point: Highest strike plus max loss.
If executed for a credit there will be two breakeven points:
Upper breakeven is same as for debit.
Lower breakeven will be the short strike credit.

Short Call Christmas Tree
Position: Long low strike call and short 1 higher strike call and short 1 call at an even higher strike.
Outlook: Neutral but fearful of downturn.
Directional Risk: Unlimited upside.
Max gain: Limited. Max gain is difference in long and first short strike plus credit (or minus debit). Occurs if stock closes between two short strikes at expiration.
Max loss: Unlimited upside.
Breakeven (2 possible breakeven points):
If trade executed for a credit, there is one breakeven point: Highest strike plus max gain.
If trade executed for a debit, there are two breakeven points:
Upper: Same as for credit
Lower: Long strike plus debit

Long Put Christmas Tree
Position: Short 1 high strike put and long 1 contract of a lower strike put and long 1 more put at an even lower strike.
Outlook: Extremely bearish but fearful of an upward move.
Directional Risk: Limited upside if executed for debit (none if executed for credit).
Max gain: Lowest strike put minus max loss.
Max loss: Limited. Occurs if stock closes between strikes of two long positions at expiration.
If executed for debit: Max loss is difference between short strike and first long strike plus debit.
If executed for credit: Max loss is difference between short strike and first long strike minus credit.
Breakeven (2 possible breakeven points):
If trade executed for a debit, there is one breakeven point:
Breakeven = Lowest strike minus max loss.

Short Put Christmas Tree
Position: Long high strike put and short a lower strike put and short a put at an even lower strike.
Outlook: Neutral to slightly bearish but fearful of an upward move.
Directional Risk: Unlimited downside.Max gain: Limited. Max gain is difference in long and first short strike plus credit (or minus debit). Occurs if stock closes between two short strikes at expiration.
Max loss: Low strike put minus max gain. Occurs at a stock price of zero.
Breakeven (2 possible breakeven points):
If trade executed for a credit, there is one breakeven point:
Breakeven = Low strike minus max gain.

Long Semifuture
Position: Long high strike call and short a lower strike put.
Outlook: Very bullish. The sale of the put reduces the cost of the call but also exposes the trader to unlimited downside risk.
Directional Risk: Unlimited downside.
Max gain: Unlimited.
Max loss: Put strike plus debit (or minus credit). Occurs at a stock price of zero.
Breakeven (2 possible breakeven points):
If trade executed for a credit:
Breakeven = Put strike minus credit

Short Semifuture
Position: Long low strike put and short a higher strike call.
Outlook: Extremely bearish. The sale of the call reduces the cost of the put but also exposes the trader to unlimited upside risk.
Directional Risk: Unlimited upside.
Max gain: Put strike minus debit (or plus credit). Occurs at a stock price of zero.
Max loss: Unlimited upside.
Breakeven (2 possible breakeven points):
If trade executed for a credit:
Breakeven = Call strike plus credit.

Long Wrangle
Position: Long call backspread and long put backspread.
Outlook: (1) Extremely bullish or bearish but uncertain of direction or (2) Expecting an increase in implied volatility.
Directional Risk: None.
Max gain: Unlimited upside and downside.
Max loss: Net debit + difference in strikes. Occurs if stock closes between the strikes at expiration.
Breakeven (2 breakeven points):
Lower = Low strike minus max loss
Upper = High strike plus max loss

Short Wrangle
Position: Short call ratio spread and short put ratio spread.
Outlook: Neutral to slightly bullish or bearish.
Directional Risk: Unlimited in both directions.
Max gain: Initial credit + difference in strikes. Occurs if stock closes between strikes at expiration.
Max loss: Unlimited upside and downside.
Breakeven (2 breakeven points):
Lower = Low strike minus max gain
Upper = High strike plus max gain

Long Cartwheel
Position: Long call backspread and short put ratio spread.
Outlook: Extremely bullish to slightly bearish.
Directional Risk: Unlimited downside.
Max gain: Unlimited at extreme upside (above upper breakeven). Max gain at low strike (upper peak) = Difference in strikes + credit (or minus debit).
Max loss: Unlimited at extreme downside (below lower breakeven). Max loss at high strike (lower peak) =
Credit – difference in strikes (or debit + difference in strikes).
Breakeven (3 breakeven points):
Lower = Low strike – max gain at low strike
Middle = Low strike + 1/2 max gain at low strike
Upper = High strike plus max loss at high strike

Short Cartwheel
Position: Long put backspread and short call ratio spread.
Outlook: Extremely bearish to slightly bullish.
Directional Risk: Unlimited upside.
Max gain: Unlimited at extreme downside. Occurs at a stock price of zero. Max gain at high strike (upper peak) = Difference in strikes + credit (or minus debit).
Max loss: Unlimited at extreme upside (above upper breakeven). Max loss at low strike (lower peak) = Credit – difference in strikes (or debit + difference in strikes).
Breakeven (3 breakeven points):
Lower= Low strike – max loss at low strike
Middle = Low strike + 1/2 max loss at low strike
Upper= High strike plus max gain at high strike