If you started trading Forex recently and have gone beyond the Forex basics, or are just a beginner trader on the lookout for strategies and tools that will increase the effectivity of your trading, then you might have heard of Harmonic Patterns, their deeply mathematical nature, and the fact that they are used by many a trader to increase their revenues. Using Harmonic Patterns Forex is not an easy thing to do. The process involves a lot of mathematics and a lot of thinking. Though, while the technique might seem like an extremely cerebral one, it is not necessarily a skill that cannot be acquired through a lot of practice and a lot of research. The original creator of Harmonic patterns spent a lot of time trying to understand what they are and devising the many frameworks and patterns that would actually make mathematical sense. Today there are many patterns that have been added to the roster of known ones, but the few original ones remain as the best known and most useful.
Harmonic trading patterns explained and history review
So where do Harmonic patterns find their origins? The concept of harmonic patterns finds its foundation with the mathematical ratio, also known as the Golden Ratio, 0318 or, more commonly, 1.618. This mathematical constant was discovered a very long time ago and has since inhabited the minds of humans aware of it. The fascinating fact is that this Golden ratio is also present in the natural world, in plants, animals, planetary alignments and star systems, independently from humans. The Golden Ratio also exists in man-made objects, without the need for humans to have been consciously been aware of it to use it in their architecture, design, music, and art. It was especially popular in the Renaissance art period when the mathematical discovery and the artists of the day were closely connected. It was regarded as the most pleasant ratio, and even today, people who study art and mathematics often notice its presence in the world and remark how it enhances the natural beauty or efficiency of wherever it is present. The discovery of the golden ratio also led to the discovery of the Fibonacci sequence and a new understanding of mathematics.
So it is not surprising that the Golden Ratio has found its way, whether consciously or unconsciously into the world of financial exchanges. It is often seen in the price relationships and fluctuations of many assets. Which is why the Golden Ratio is also often used in determining the price patterns of certain assets. The ratio of 0.618 is what was used for the basis of Harmonic Patterns, for the determination of how they are used and for the construction of their framework. Scott Carney is the first person to have figured out how to trade Harmonic Patterns because he was the inventor. The man had been working on the Stock Markets for a long time and had applied his mathematical talent to the way he analyzed the markets. He soon identified that some of the patterns that the FX market exhibited were related to the Fibonacci numbers and the Golden Ratio. After this realization, he started building the Harmonic Pattern framework. Though he was not the only one to have contributed to the overall framework. There were many other researchers and trader who contributed to the specifics of patterns that we discuss below.
The main goal of the framework, as explained in the Harmonic Trading Scott Carney wrote, is not only to understand the trends that are happening right now and where they are headed but to also identify where they might be going. In a way, it is one of the indicators that, as their goal, have the identification of future trends, future prices and using the predictions to the advantage of the trader. The prediction happens through the identification fo the past numbers, pairing them up with the present ones and figuring out where the golden ratio would lead the numbers next. While the process might seem simple at its most basic, the potential for error, especially for amateur mathematicians and beginner traders is rather immense. This means that before deploying funds according to the predictions made, the traders will have to be confident of their skill and of their mathematics.
The main goal of those who use the tool is to find patterns of differing magnitudes and lengths and apply the Fibonacci ratios to them, as a way of predicting future fluctuations.
There are many risks and issues associated with Harmonic pattern trading that will be discussed a little below.
Common Harmonic patterns
There are numerous harmonic trading patterns that have been identified to this date. All of them offer a way to analyze the current events on the market by contextualizing them into a defined pattern and then applying the knowledge acquired through this process to predictions. Though some are more effective than others, multiple patterns can be applied to a single set of numbers. Not all of them will be right and often times, it is important to consider your own expectations of the market and how this might be cause for bias in your calculations. Here are some of the most common patterns applied by Harmonic traders today, and you will learn how to draw harmonic patterns. Though there are more out there, and they can be more complex, so don’t forget to do your research before you get into them.
Invented by H. M. Gartley in the early 1930s, the Gartley chart has been the most widely applied Harmonic pattern in the world since then. When it was first released as part of Gartley’s book, the Harmonic Pattern trading strategy based on the Gartley chart, became one of the defining qualities of the coming years on the American stock market and beyond. Today, the strategy is applied to the Forex market with the kind of confidence rarely seen with any other strategy.
The Gartley predicts the future, relatively long term, the direction of the price of an asset, based on some of the identifying features taking place currently. There are two kinds of the Gartley pattern, which once identified, might predict one of two options for the value of the asset. The bullish Gartley chart starts off with a low price, with the following rise to a high, then a fall to a low and then a sharp rise to a high point, ending in a value level similar to the one before. Once this pattern is identified by a trader, they will be able to predict a sharp rise in value and a bullish attitude from the traders.
The second Gartley pattern identifies that a bearish attitude might be coming towards an asset. This pattern usually looks like the reverse of the bullish one and predicts that the coming value of the asset will be falling. In both cases, traders use the Gartley chart as a way to identify the longer term value prospects of the chart and to enhance their short term trading decisions and bias them in the direction of the coming changes, in order to make a bigger profit.
To draw this pattern, one would have to apply a set of numbers to each of the points they start or keep measuring from. The starting point should be considered the zero point, with each following point being marked as 1, 2, 3 and 4. The pattern is complete once certain distances are determined between each individual point. The picture below should demonstrate the distances and the shape of the chart well enough that you will be able to draw it in the future.
The Bat pattern, you might notice, is in shape similar to the Gartley pattern. Though this does not mean that it is entirely similar – the measurements in the case of the bat pattern are very different. SohHow to trade Harmonic Bat Pattern effectively? Well, the expectations set by the Bat are pretty similar to the Gartley, but the bat will provide the traders with an easier time when identifying the perfect point for a stop loss and when figuring out what your expectations should be and what the risks associated with your decisions might be. The construction of the bat pattern is similar to that of the Gartley, and it is offered in the bullish and the bearish forms. This
The Crab was considered to be the most precise indicator by the inventor of Harmonic pattern prediction. He believed that this one had the highest rate of indicating when a reversal would happen and that it was the most useful of all the harmonic patterns out there. The shape of the pattern is a little wonky and the butterfly is reminiscent of it, but the measurements are a little more extreme. The wonkiness comes from the fact that the final point of the chart extends beyond that of the starting point, indicating either a fall or rise below the initial value of the asset being measured, which will then be followed by a reversal of the pattern. If identified on time, this is when you would take action to either buy or sell an asset. Below you will see a chart displaying both the bullish and the bearish version of this pattern so that you will have an easier time identifying them in the future.
The butterfly is related to the crab pattern, but the measurements of the chart are a little different. The chart is also considered to be less precise in its predictions than the crab is, but then again, most were considered to be less precise than the crab, by Carney. Still, the butterfly provides valuable information and comprehensive information on the expectations and on what the future of the asset holds.
There are allegedly other patterns that traders try to use in their market operations. The four above are the most tried and trusted that we are aware of. We would not necessarily recommend working with any of the other possible patterns. If any interesting ones come up, we will add them to the list.
Harmonic patterns trading strategy
Harmonic patterns are one of the most complex tools to use, as they require a lot of knowledge and practice to successfully identify and use in the context of the real market. The issue lies not with the fact that these patterns are hard to identify because of the calculations or because of the geometry involved, even though this is definitely not easy, but with the fact that these patterns are incredibly hard to successfully apply in the fast-paced nature of the markets. Some traders simply lack the practice to successfully and objectively observe the patterns when they are taking place, or even the experience to look for them. On the other hand, some misplace and mistake certain fluctuations on the market for one or another pattern, which results in them making the wrong call and losing money. Which is why in order to learn how to trade with Harmonic trading patterns, we recommend spending time learning how to calmly observe the market over long periods of time, and identify the fluctuations as part of one pattern or the other.
The best way to use harmonic patterns is in conjunction with other indicators. They are a great way to contextualize any kind of changes on the market, especially if the context is further explained by the explanation of the many fluctuations on the market by the detailed indicators such as the ADX indicator or the Accelerator Oscillator Indicator. The harmonic patterns do not provide a specific number where the reversal will happen, but give a more general area of reversal, so as to provide traders with a time frame when it will happen. There is no such thing as trading harmonic patterns vs indicators, as the best way to trade is when both sides are used in conjunction with each other. This way the data is contextualized and fills up whatever might be missing from the overall picture, in order to make the orders more successful.
There are issues associated with the Harmonic pattern trading strategies, these being the risks associated with them. The predictions are not always one hundred percent true and sometimes, they end up being not true at all. The mathematical equation and calculation, while effective in a perfectly mathematical world, are not always good at understanding how the market will act. The human factor is extremely important when considering the movements of the market, and the attitude of the people on the market will often define its direction. This direction will not always be the same that the Harmonic patterns predicted. Which is why it is important to hedge even against such mathematical tools and predictions.
Another thing to consider when trading with the harmonic patterns indicators is the complexity of the process. Establishing whether a pattern is present and understanding whether it is in the direction that will benefit you is not an easy process. The kind of patient and practice required for the successful application can only be seen in other precise mathematical methods and models. It is thus dangerous for absolute beginners to assume they know what they are doing when trading with Harmonic patterns.
Harmonic pattern software
There are many pieces of software out there to enhance your experience of trading with Forex assets. There is also, for those who are looking, a Harmonic pattern piece of software available, though there is definitely more than one. The desired software should be able to automatically identify the patterns on the market feed of the asset you have provided, and give you graphical feedback on them. This means the software will indicate where, when and what kind of patterns are or were taking place on the market. This is a very convenient piece of software, which is able to provide users with easy and hassle-free ways of identifying harmonic patterns. The only issue is, there are too many software instances promising to provide this service in most kinds of traders – the MT4 and MT5 both each have dozens of programs that one can download.
You have to be careful when selecting which to download. Any single one of them may be an add on designed to have a negative effect on your income and on your revenues. Stay vigilant and don’t download unlicensed software, or software the origins of which are dubious. The best way you can go about this is to find which are the most recommended and which come from legitimate providers and download those.
You also should remember that automatic Harmonic pattern scanners will often display false positives. This is because the market does not always follow the mathematics established by humans, but only follows the whims of the traders and the direction of their expectations. As a result, the graphical feedback and positives you will get from the market scanner will sometimes be off. Some of these false positives will be easier to identify than others, as they will be present as a result of extreme highs and extreme lows. The best way to go about identifying the patterns is to remain which seem to be too extreme and which seem to be false positives by the scanner. Otherwise, you may end up losing a lot of money.
The harmonic pattern success rate
This ties in with the last paragraph of the previous subject. You see, the success rate of the harmonic pattern trading is dependent on the trader in the first place and on the math in the second. Traders that are able to successfully identify false positives will be able to have a higher success rate than those who are incapable of identifying such. It is also often that the patterns that are found by traders or scanners are not going to be signaling the reversal at all. While some are false positives, some will be the result of the market sentiment not agreeing with the mathematical patterns devised by Carney or by the other who have been using harmonic patterns in their trading. Some report that the success rate of harmonic patterns is somewhere between 80-90%, while others say that the numbers are much lower. The inventor of harmonic patterns thinks that the crab pattern has the highest success rate, while others have lower success rates. A comprehensive study has yet to be done to establish this.
Harmonic patterns have incredible potential to increase the earnings of any trader. The biggest problem with them is the trader him or herself. Those who are unable to judge correctly, do the math well or identify false positives and remain aware of the risks, will be unable to successfully utilize the tools. Which is why we encourage you to keep studying, before you start using.