Harmonic Patterns in Forex Trade

Patterns are prolific storytellers in nature and they have proven to be persistent and helpful in predicting frequencies and fluctuations of systems. From natural events such as weather patterns and movements of stars to man-made events such as financial downturns and political upheavals, patterns are involved. And get this--patterns are present even in Forex trade and now we can harness the understanding of patterns to reliably identify profitable trade opportunities. We will focus on harmonic patterns in this article, which are more complex and dynamic than other geometric price patterns. Harmonic price patterns are grounded in the relationships between Fibonacci numbers harnessing their predictive power to analyze price fluctuations of the past to predict future trajectories. Using FSO harmonic scanner in forex trading involves a keen eye to spot potential patterns that adhere closely to Fibonacci numbers and ratios. Here, we will look at five common harmonic price patterns to give you a background on what to look out for when analyzing price charts. Across all five patterns are two variations: bullish (rising prices) and bearish (falling prices).

The Gartley

This is the oldest pattern and it takes its name from the H.M Gartley, the author of Profits in the Stock Market. Not only is it the oldest, but all other preceding patterns are modified versions of this pattern. Visually, the bullish Gartley looks like the letter “M” while the bearish Gartley looks like the letter “W”. We begin at price point X at the bottom of the first leg of “M” from where the price moves up to point A and then to point B. The retracement of wave A is .618. Moving upwards, the price moves to point C with a .382 to .886 retracement of AB then downward to point D with an extension of 1.13 to 1.618 of AB. Traders often look for CD to extend 1.27 to 1.618 of AB.

The Bat

Discovered by Scot Carney, this pattern looks similar to the bullish and bearish Gartley, but measurements between price points differ significantly. It begins with a price increase between point X to point A and downward to point B. Point B retraces at .382 of XA. From B to C there is a retracement of .886 to XA. CD is an extension of 1.618 to 2.618 to AB. Point D is an area of interest for Forex traders as it contains information on where to place a stop-loss.

The Butterfly

Discovered by Bryce Gilmore, this is another variation of the Gartley pattern. Its pertinent defining characteristic is the 0.786 retracement of AB from XA. The following are more detailed measurements of this pattern: •From XA, AB retraces at 0.786 from XArn•BC retraces at either 0.382 or 0.886 from ABrn•When BC retraces at 0.382 from AB, then CD should extend at 1.618 from BC. Also, if BC retraces at 0.886 from AB, the CD should extend from BC at 2.618. •CD should extend at either 1.27 or 1.618 from XArn

The Cypher

The Cypher patte is similar to others on this list; however, it is different in how BC moves beyond the XA move. This allows us to use the AB extension level to measure the potential BC output. •From XA, AB retraces either at 0.382 or at 0.618. •From AB, BC retraces at 1.13 and should be opposite of the AB movement at 1.414rn•CD retraces at 0.786 from XCrn

The Crab

Also discovered by Scott Carney, a harmonic price pattern enthusiast, the Crab is extremely accurate. Thanks to how extremely Potential Reversal Zones (points of price reversal) move from XA and tight stop loss points, this pattern has a reputation of high rewards to risk ratios. Its specific ratios are as follows: •From XA, AB should be either 0 .382 or 0.618 of retracementrn•From AB, BC should retrace at either 0.382 or 0.886rn•If BC retraces at 0.382 from AB, then CD should retrace at 2.24 from BC. Furthermore, if BC retraces from AB at 0.886, the CD should retrace at 3.618 from AB and CD should extend at 1.618 of XA. rnWith practice and experience in Forex trading, you will soon build an eye for such patterns. This is the first step in implementing harmonic patterns to identify trade opportunities. Each pattern has a PRZ (potential reversal zone) which can be accurately determined by price patterns that adhere to the above ratios. This allows you the trader to place stop-loss at places you can be sure about. An important factor to keep in mind is that any potential patterns you see should adhere to the above ratios in order for the predicted PRZ to be accurate. With this knowledge under your belt, you should be able to accurately identify price patterns and make confident calls on trade decisions which will yield you profits.