Harmonic patterns in the currency markets

David Humphrey's picture
Authored by David Humphrey
Posted Thursday, December 6, 2018 - 5:34am

Harmonic trading focuses on price patterns to help traders enter and close trades. Harmonic price patterns make the use of geometric price patterns. They nevertheless make the process much more detailed since they utilize Fibonacci numbers. This results in accurate turning points. The goal of harmonic trading is to preempt future market movements. Traders who are able to forecast the trends of prices are at a much better position when it comes to profitability. But how exactly do harmonic price patterns help traders in the currency market? We will take a look at some common patterns as well as the methods used in determining prices in the market.

The blending of Fibonacci numbers and geometry

For harmonic patterns to be useful, a combination of geometry and Fibonacci numbers is necessary. Basically, Fibonacci numbers bring some order into the otherwise disorderly geometry.

This is because Fibonacci numbers have patterns that are traceable. The primary Fibonacci ratio and its derivatives are used to predict different future market movements when combined with chart geometry. While this method of price determination is great, it also comes with some issues. First, harmonic patterns might not be the only patterns observed in a particular chart.

The different waves that are observed can thus be confusing when traders are not skilled at focusing on the bigger picture. Other than that, patterns can also fail whenever a trader takes a position in the reversal area.

Trading With Harmonic Visual Patterns

Despite the few issues though, harmonic patterns are some of the most consistent in any given map and traders can use them effectively to gain profit. But first, the trader must be acquainted with the patterns. Here are the main visual harmonic patterns as well as how to trade them. We will look at each independently.

1. The Gartley

The Gartley pattern is set in the context of a broader trend. This pattern takes the premise that corrective waves will ultimately correct an early onset of an established pattern. If the early pattern is bullish, for instance, a corrective wave will be observed culminating in the potential reverse zone. This zone is where long positions are likely to result in a positive trading session. On the flipside, the bearish pattern would also be observed to have the reversal in this area. Traders, therefore, use the Gartley when looking for positions of entry and exit.

2. The Butterfly

The Butterfly focuses on short trades. This pattern takes the premise that a pattern will be established whenever the retracement level has been reached by a wave. The wave could either be an up or down wave. For the upward looking wave, the market is bearish and a Fibonacci ratio could indicate the point in which to enter the market. Since this pattern is mostly used for the short trades, traders have the best chances of profitability when using tools like the stop loss.

3. The Bat

In many ways, the Bat looks like the Gartley. Besides from looking similar though, the ratios that accompany this pattern are different from the other patterns. It is possible to make long trades with the Bat because the retracement levels are easily identified with a change in the wave. The confirmation of a trend is often marked by the change in the direction of the wave. An up wave will thus move down in a bullish market while the opposite is true for the bearish market. Just like with the Butterfly, the use of a stop loss will result in better yields for traders.

4. The Crab

The Crab is arguably one of the most accurate patterns in the trading market. This pattern provides clear reversals and it works perfectly with Fibonacci numbers. Characterized by pullbacks, the Crab pattern records very specific retracement levels. The trader can, therefore, take long trades far more confidently and also deploy the stop loss with ease.

To Sum Up

Traders who prefer pragmatic and mathematical trading always find harmonic trading to be the best option. The method is quite specific and this makes it predictable in most markets. In order to use harmonics properly though, a trader needs to practice a lot and to study harmonic patterns extensively. Doing this can help them avoid mishaps when it comes to pattern identification.