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Harmonic Trading

1. What is Harmonic Trading

Harmonic Trading is a methodology that utilizes the recognition of specific structures that possess distinct and consecutive Fibonacci ratio alignments that quantify and validate harmonic patterns. These patterns calculate the Fibonacci aspects of these price structures to identify highly probable reversal points in the financial markets. This methodology assumes that harmonic patterns or cycles, like many patterns and cycles in life, continually repeat. The key is to identify these patterns and to enter or to exit a position based upon a high degree of probability that the same historic price action will occur.

2. Fibonacci numbersTo trade the Harmonic pattern you would need to add some more Fibonacci level into the default setting. (In mt4: right click on the Fibonacci Retracement-> choose property -> Fibo level -> add) Fibonacci Retracement:
• 0.382
• 0.50
• 0.618
• 0.707
• 0.786
• 0.886
Fibonaci numbers to add into Fibonacci Expansion:
• 1.13
• 1.272
• 1.414
• 1.618
• 2.0
• 2.24
• 2.618
• 3.14
• 3.618

** Note for newbie: When draw Fibonacci in mt4, it has 2 legs with 3 points. When we need an expansion/projection of AB, make sure the first point of the Fibo Expansion at A, the second at B and the third at A too. If you forget to drag the third point back to point A, your projection is COMPLETELY WRONG.3. Potential Reversal Zone(PRZ)Every harmonic pattern possesses a potential reversal zone (PRZ). This zone is a place where with high probability, a reversal might take place. In the next chapters, we will discuss how to identify the PRZ for each pattern. Let's get to it! 

 Welcome to the first Harmonic Pattern article of Whirlpool. The Bat pattern requires some very specific rules that be followed strictly to be considered valid. RULES: B point at a less than a 0.618 retracement of XA, preferably a distinct 50% or 38.2% retracement. •D point need to be in the rage of BC projection. And BC projection must be at least 1.618 and maximum 2.618. • AB=CD pattern is usually extended. (CD= 1.27 AB or CD=1.618AB or AB=CD, depends on which gives the most compact PRZ) • 0.886 XA retracement. • C point with range between 0.382 and 0.886 of AB 3 elements define the PRZ:

  • 0.886 XA retracement.
  • BC Projection- we will choose the projection give the most compact PRZ
  • AB=CD and its alternatives
1. Bullish Bat pattern

It is CRITICAL that Every points must satisfy all the rules and the ratio alignments in the image above. There is almost NO Exception for that. These ratios have been tested with thousands of pattern and proven to be very profitable trading them. Following the rule strictly will keep traders from bad setups and false harmonic patterns. Examples: 

Figure 1

CD = 1.618 AB. In the first example, the Bat pattern is one of the most beautiful Bat I've ever seen in my entire trading career. Point B comes right into 50% retracement of XA - point C is obviously in range so we don't need to check. 0.886 XA retracement, CD=1.618 AB and BC projection 2.0 define a very compact zone (brown rectangle). The price comes in, stabilizes and reverse beautifully. The stop loss level for the pattern should be right below point X. Execution and Profit target are super important in harmonic trading and we will have a whole chapter to cover these skills. For now, we need to train our eyes to spot the pattern and pinpoint our opportunity to make profit with the harmonic pattern 

Figure 2

CD= 1.27 AB The second example is a very well-formed Bat. Point B comes right into 50% retracement of XA .0.886 XA retracement, CD=1.27AB and 2.0 BC projection clearly define a compact PRZ ( gray rectangle). The Price comes in and get immediately rejected from the zone. However as we can see, the PRZ only provides a temporary support for the pattern - not a home-run reversal as in the first example. Most of the times, harmonic patterns only provide a temporary support/ resistance. That's why where to take profit and how to execute the trade is very important. 

2. Bearish Bat pattern

It is CRITICAL that Every points must satisfy all the rules and the ratio alignments in the image above. There is almost NO Exception for that. These ratios have been tested with thousands of pattern and proven to be very profitable trading them. Following the rule strictly will keep traders from bad setups and false harmonic patterns. Examples: 

Figure 3

CD=1.27AB In the first example B Point exceeds 50% retracement however it's still quite far from 61.8% retracement and doesn't close above the 50% level, so B point is still valid for a Bat pattern. 0.886XA,CD=1.27AB and 1.618 BC Projection pinpoint the PRZ nicely. The price comes in and get immediately rejected from the zone, marking point D and the Bat completes. 

Figure 4

CD=1.618AB In the second example B Point exceeds 50% retracement and almost reaches 61.8% retracement. B point in this situation leaves us with a very difficult choice between trading the Gartley (discussed in next chapter) and the Bat. In this situation, we would favor the one with the most compact PRZ, which is the Bat pattern. 0.886XA,CD=1.618AB and 2.0 BC Projection pinpoint the PRZ nicely. The price comes in, test the PRZ with significant bull strength. As you might notice, the price even break X high, which took out my stop loss. However, the price comes back into the PRZ and marks a reversal in trend. This is an example of Harmonic pattern in strong trending market. Sometimes, price will just cut through the PRZ, sometimes test the PRZ with high volatility as in this example. We, traders, have to be prepared for all the scenarios that the market might give us. *Note: in this second example, magically both Gartley and Bat work. The price comes up just to be rejected at 0.786 Retracement, which compltes the Gartley pattern. 

Here we will explore a super powerful pattern in the Harmonic arsenal, which is the Butterfly pattern. As is the case with all harmonic patterns, Butterfly requires specific rules Butterfly pattern elements: • Precise 78.6% B point retracement of XA leg. • BC projection must be at least a 1.618. • Equivalent AB=CD pattern is minimum requirement, but the Alternate 1.27 AB=CD is the most common. • 1.27 XA projection most critical number in the Potential Reversal Zone (PRZ). • No 1.618 XA projection. • C point within range of 0.382–0.886 retracement. 3 elements define PRZ:

  • 1.27 extension XA ( the most important)
  • BC projection – we choose the projection which gives the most compact PRZ
  • AB=CD or its alternatives
Figure 1

Figure 1 represents a very common butterfly. Normally a successful butterfly will reject the price immediately on the first test, hence, the reversal is very sharp. CD=1.27AB, 2.0 BC Projection and the most important one 1.272 XA projection define the tight PRZ. Price show an immediate reversal after test the whole area.

Figure 2

Figure 2 is an example of failure in Harmonic pattern. The price just goes through the whole PRZ, comes to retest this area then falls. Although B point is at 0.786 XA and 3 elements neatly define the PRZ, the pattern sill FAILS. There is nothing call certainty in this market, so don't hallucinate about 100% winning rate. 

2. Bearish butterfly pattern
Figure 3

Figure 3 Figure 3 shows a perfect Butterfly pattern reversal. We have managed to catch the whole new downtrend and ride the trend by combining harmonic pattern and Elliot wave theory (discussed later). Again B point at 0.786 XA retracement is critical. You can read on other sites which give you different ratio alignment for point B. However, we have tested thousands of Butterfly pattern and 0.786 Retracement comes out to be the most precise and reliable. 1.272 XA , 1.618 BC projection and CD=1.27 AB define a perfect reversal zone for the pattern.

Figure 4

The Butterfly in figure 4 utilizes AB=CD, 2.24 BC projection and1.272 XA to form the PRZ. As usual, price get rejected at the first time testing this area. Note: as you might have already noticed, the price action in Butterfly pattern sometimes doesn't test the whole PRZ. That's why the entry point for trading the butterfly should be at 1.272 XA projection, which is the most important level in the PRZ. Butterfly works best when price comes to create relative new high and new low. 

 Gartley pattern possesses a very similar look as the Bat. However the ratio alignment is different. Rules: • Precise 61.8% B point retracement of XA leg. • BC projection must not exceed 1.618. • Equivalent AB=CD pattern (most critical) • 0.786 XA retracement. • C point within range of 0.382–0.886 retracement. 3 elements define the PRZ:

  • 0.786 XA retracement
  • BC projection
  • AB=CD ( the most important)
As with all harmonic patterns, the specification of Fibonacci points within each structure is extremely critical in determining valid trading opportunities. All the rules need to be followed strictly !
1. Bullish gartley pattern
Figure 1

Figure 1: In the first example, point B is 99% right at 61.8% of XA. AB=CD, 1.272 BC projection and 0.786 XA define the PRZ. Price tests this area severely, which in a moment I thought I would be taken out of the trade. However, harmonic rules! The price is quickly rejected, creating a double bottom and rally. 

Figure 2

Figure 2: The second example shows a standard Gartley pattern. It is important to wait till all the PRZ has been tested. Patience and Decisiveness are keys in trading harmonic pattern. In the example, Price show a long blue candle right above the PRZ after falling dramatically. If trader lose his cool and buy, he will surely buy at the top. In the other hand, a patient trader will wait till the price comes in, tests the area then buy. AB=CD, 1.13 BC and 0.786 XA retracement form a very tight zone on the chart. The price gets rejected quickly after testing the PRZ. As usual, the PRZ only provide a temporary support.

2. Bearish Gartley pattern
Figure 3

In figure 3, it is again very important to wait until the whole PRZ has been tested, especially the AB=CD level as it is the most critical element in the PRZ. AB=CD , 1.272BC and 0.786XA define the PRZ. Price tests the PRZ twice before giving up and "let the sky fall" begins :D

Figure 4

Figure 4 illustrates a situation where the PRZ only provides a temporary resistance. Price tests this zone 3 times before the bull take over and price rally unstoppably. Although the Gartley can't mark a reversal, AB=CD,1.272 BC and 0.786 XA creates a compact PRZ, which stops the rally for a while. And again, one of the most critical things to define a valid Gartley pattern is 61.8% retracement of point B. Gartley vs Bat: The difference between Bat and Gartley is the B point. We have different ratio alignment for B point in 2 patterns. Beside, if we mistake one pattern for another,let's say we mistake the Gartley for the Bat, we might miss a trade as the price can reverse at 0.786 XA and doesn't even test the 0.886 XA retracement. Experience and practice will tell you which pattern you are dealing with. If there are times when you can't decide between Bat and Gartley, my advice would be stick with the Bat because it is safer when we can sell at higher price and buy at lower price compared to Gartley. 

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