Forty Fourth session of Forex Training
Welcome back to Forex professional training in financial markets.
In this session Harmonic Patterns® will be studied.
Harmonic Patterns® are based on a reversal point derived from Fibonacci levels that shows Potential Reversal Zones, known as PRZ.
Failure probability of Harmonic Pattern® is high, thus trader must combine it with other confirmations if he/she wants to place an order on the basis of a Harmonic signal.
Harmonic Pattern® may frequently produce invalid signals under some conditions such as:
- Invalid signal owing to price gap arisen during market close time from Fridays to Mondays. Price gap may develop as a result of a key News or an event during working days.
- Invalid signal due to inaccurate Candlestick analysis. A candle may close far over or below trader’s speculations.
“AB equals CD” pattern is one of the most popular types of Harmonic Patterns® which has simpler structure rather than other Harmonic Pattern® types.
As illustrated on the graph, two Fibonacci patterns must be drawn on three swings.
If first Fibonacci is drawn on AB swing, then trend must return to an area between 61.8% or 78.6%.
A reversal point on this region, called C, causes trend to change its direction. Another Fibonacci should be drawn from B to C.
Trend must proceed to an area between 127.2% and 161.8% of second Fibonacci.
It is possible for the trend to reverse its direction again, from the point D.
A trader can place an order agreeing with trend direction from the point D.
This pattern has Bullish and Bearish types and failure probability of this pattern is high.
An example on MT4 has been drawn on a Bearish trend.
Market price has declined from point A to point B, then it returned to point C which is over 61.8% of first Fibonacci.
Trend has decreased until point D, near 127% level of second Fibonacci.
It was assumed that the trend would change its direction towards the top.
Another Harmonic Pattern® is called Gartley. It consists of 3 different Fibonacci patterns with 2 various TP prices.
Both Bullish and Bearish types have the same procedure and relations, however, trend on a Bullish type will continue its upward trend and on a Bearish mode it will decline after certain fluctuations.
Trend moves from the starting point X towards the point A, then it reverses its direction until it reaches point B.
If first Fibonacci is drawn on XA line, then B should be around the 61.8%level.
On a reversal point B, trend returns to its direction and proceeds to a certain point C.
Second Fibonacci should be drawn on AB, and C must be between 38.2% and 88.6% of second Fibonacci.
After another change of direction, the trend continues toward the point D.
The last Fibonacci should be drawn on BC line, and D has to be in a region between 127% and 161.8% of the third Fibonacci.
Point D should be around 78.6% of the first Fibonacci that was drawn on XA swing.
The relation between the point B and XA swing is shown on the dashed line XB.
Also, the relation between C and AB line is indicated by the dashed line AC.
Finally, the relations between D and BC, and D and XA, are specified by the dashed lines BD and XD,respectively.
An example on MT4 platform would clarify how to exploit this pattern.
On the Gold chart there is a downward trend that has returned over 61.8% of Fibonacci level.
After it has met this point, trend declined to a certain spot which is around 61.8% of the second Fibonacci.
Trend direction changed towards the top and until it reached 127% of the third Fibonacci.
After this point, it was apparent that price would decrease.
Butterfly is another Harmonic Pattern® with 3 Fibonacci patterns in which trend starts from the point X.
In a Bullish type,as trend reaches the point A, it reverses its direction toward the point B.
Reversal point B is on 78.6% of Fibonacci over XA.
Then price increases towards the point C that is between 38.2% and 88.6% of Fibonacci on AB.
The last swing should be towards the bottom until it touches the point D.
The point D must be in between 161.8% and 261.8% of the third Fibonacci, also, D should be over 127% and less than 161.8% of the first Fibonacci.
The Bearish format has the same method and procedure.
An example of a Bearish Butterfly on MT4 was already drawn. The relations between points and lines are specified.
Two waves with certain peak and valley heights.
Finally trend has decreased from the last point which was a good spot to place a Sell order.
A Bat pattern is another Harmonic Pattern® type with 3 Fibonacci patterns.
Price starts its movement from X to A, then AB swing would return to the region between 38.2% and 50%.
Trend returns from B to point C, which is between 38.2% and 88.6% of Fibonacci AB.
The final swing from C to D has an opposite direction to BC.
The point D would be in the area between 161.8% and 261.8% of BC, plus 88.6% of XA.
Trend would probably change its direction from the point D.
A Bat pattern example on MT4 is shown to clarify its shape and relations. Two connecting waves have formed a valid Bat pattern.
The last type of Harmonic Pattern® studied in this session is a Crab pattern.
First swing is from X to A, followed by an AB swing on the region between 38.2% and 61.8% XA.
BC swing with opposite direction to AB is in the area between 38.2% and 88.6% of AB.
Another reverse swing, CD, which is over 224% and less than 361.8% of BC. Point D is around 161.8% of Fibonacci over XA.
There is an example on MT4 that shows a Crab pattern with its relations and conditions.
There are other Harmonic Patterns®, such as:
- The 5-0 pattern
- Shark pattern
- 3Drives pattern
- The Alternate Bat pattern
It is recommended that traders exploit free indicators available on the internet which can draw Harmonic Patterns® automatically.
That concludes this session, until next time and another session take care.