There is actually an easy way to trade using harmonic patterns without the need for complex calculations or checking the validity of each pattern one by one. In this article, you will find shortcuts that simplify trading with harmonic patterns. Although trading with harmonic patterns can promise high signal accuracy, for beginners, the process of identifying patterns and executing orders often feels complicated. If you experience this, this article will cover an easy way to trade with harmonic patterns using some simple tools.
Easy Way to Identify Harmonic Patterns on Charts
The main problem in recognizing the formation of harmonic patterns is the complexity of measuring the positions of each point using Fibonacci Retracement. Each Fibonacci pattern (another name for harmonic patterns) has its own formation requirements, and memorizing just one pattern can be a big challenge for beginners. As a reminder, there are 6 popular harmonic patterns often used, namely: Gartley, Bat, Butterfly, Crab, Cypher, and Shark. These six patterns provide reversal signals with relatively high accuracy. Here is an easy way to trade with harmonic patterns through the following steps:
Look for Price Patterns Shaped Like the Letter "M" or "W" on the Chart This first step will be easier to do if you are already familiar with technical analysis techniques using Price Action.
Draw a Retracement Line on the First Swing Using the Fibonacci Tool Retracement is a primary requirement in the formation of Fibonacci patterns. If this requirement is not met, then the accuracy of the signal can be said to be invalid. The acceptable Retracement range is between 38.2% to 78.6% of the first Swing. If it is outside this range, the pattern cannot be used.
Continue Until You Get the Basic "ABCD" Pattern The ABCD basic pattern is the foundation of trading harmonic patterns. A Fibonacci pattern can only be considered complete or tradable when this "parallelogram" shaped pattern is formed.
- In the Cypher pattern, this characteristic ABCD pattern is already formed from the first Swing.
- Unlike the Crab, Butterfly, Gartley, and Bat patterns, where the ABCD pattern is only confirmed on the last Swing.
- If the ABCD pattern is not formed at all from point X to D (initial Swing to end), then the harmonic pattern signal is invalid, except in the Shark pattern, which often does not form an ABCD pattern at all.
Classify the Retracement Requirements to Narrow Down to One Harmonic Pattern You can classify harmonic patterns based on their visual characteristics and retracement requirements as follows:
- If the channel is parallel and the first leg Retracement is in the range of 38% to 61.8%, the pattern is likely to be a Crab.
- If the channel is parallel and the first leg Retracement is more than 61.8%, the pattern is likely to be a Butterfly.
- Visually, the Cypher pattern channel reverses direction from the Crab/Butterfly pattern channel. For example, in the Bearish Crab/Butterfly pattern, the channel will tilt upwards, whereas in the Cypher pattern, the channel will tilt downwards, and vice versa for the Bullish signal.
- If the channel narrows and the first Swing Retracement is in the range of 38% to 50%, it is most likely a Bat pattern.
- If the channel narrows and the first Retracement is more than 50%, then the pattern is likely to be a Gartley.
Confirm the Potential Formation of the Harmonic Pattern After narrowing down the harmonic pattern to one type, confirm its accuracy by checking all the formation requirements of the related Fibonacci pattern. If these requirements are not met, then the pattern's validity needs to be questioned. For example, if you find a price pattern resembling the letter "W" with a widening channel that could be a Shark pattern, ensure that the Fibonacci Shark pattern requirements are met.
Repeat Steps 1 to 5 as Needed Until a Valid Harmonic Pattern is Formed Initially, you may not be familiar with these steps. However, over time, you will become more proficient and no longer depend on memorization, making you more efficient in detecting trading opportunities.
Tips for Easy Trading with Harmonic Patterns
If you are already familiar with the formation of harmonic patterns, it can be a primary weapon in detecting trading opportunities. However, for consistent profits, you should also consider risk management (Money Management). The purpose of Money Management is to manage the amount of risk that you are willing to take if the price moves outside expectations, even if the trading signal is valid.
Example of Risk Management: After the Bearish Cypher pattern is confirmed according to the Retracement requirements, you can open a Short (sell) position with a Stop Loss a few pips near point X as the key Resistance. For example, if the Stop Loss distance from the Entry is 70 pips and the current capital is USD 1,000 with a 3% risk (USD 30), then the Lot used is 0.043 on a Standard account.
- Target Profit: Use a Risk/Reward ratio, typically 1:2, so if the SL is 70 pips, the minimum target profit is 140 pips.
Practice these steps on a demo account until you feel confident with the results.
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