Category: Forex Harmonic

Harmonic patterns and cycles are part of the trading world. In this section, we include articles about Carney harmonics and Gann cycles. Harmonic Foundations. Patterns: AB=CD, Bat, Gartley, Butterfly, Basic 5-0, alternate bat, shark.

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Forex Harmonic

Head and Shoulders Often Comes with a Different Look

The Head and Shoulders formation is one of the most traded patterns in the financial market. It offers an excellent risk-reward, thus it is very fruitful if we understand and get well acquainted with it. A typical Head and Shoulders pattern that we usually see in the trading lesson is very easy to be spotted out. However, the financial market makes a lot of adjustments. Thus, the traders need to make some adjustments as well. In today’s lesson, we are going to demonstrate an example of a Head and Shoulder pattern, which is a bit different in its looks.

The Head and Shoulders formation is one of the most traded patterns in the financial market. It offers an excellent risk-reward, thus it is very fruitful if we understand and get well acquainted with it. A typical Head and Shoulders pattern that we usually see in the trading lesson is very easy to be spotted out. However, the financial market makes a lot of adjustments. Thus, the traders need to make some adjustments as well. In today’s lesson, we are going to demonstrate an example of a Head and Shoulder pattern, which is a bit different in its looks.

The Head and Shoulders formation is one of the most traded patterns in the financial market. It offers an excellent risk-reward, thus it is very fruitful if we understand and get well acquainted with it. A typical Head and Shoulders pattern that we usually see in the trading lesson is very easy to be spotted out. However, the financial market makes a lot of adjustments. Thus, the traders need to make some adjustments as well. In today’s lesson, we are going to demonstrate an example of a Head and Shoulder pattern, which is a bit different in its looks.

The price heads towards the North with good bullish momentum. It seems that it has found its resistance, where it has produced a double top. At its second rejection, it has produced a bearish engulfing candle followed by another bearish candle. Thus, we have drawn a line to show the lowest low and the highest high.

The price makes a bearish correction. It seems to have found its support. It has produced a bullish engulfing candle followed by another one. Let us assume this is the last wave’s lowest low.

The price heads towards the North and makes a breakout at the wave’s highest high. So far, it seems like an ABC pattern. However, the price produces another bearish engulfing candle followed by a bearish candle. It suggests that the price may head towards the South for a bearish move.

It makes a bearish move and seems to have found its support. The level of support produces three consecutive bullish candles. Let us draw another line here. Here is a question. Do you see anything here? If you do, you are well known with Head and Shoulder pattern. If you do not, you may have to study and work with your Head and Shoulder pattern more.

The price makes another bearish move upon producing two consecutive bearish candles. Some Head and Shoulder pattern sellers may want the price to go further down to have its support at the same neckline level. However, the price does not go towards the same neckline level. It makes a breakout at the very last lowest low. What do the sellers do here? Let us find the answer from the next chart.

The chart shows that the price heads towards the South with good bearish momentum. It may continue its move up to the first swing low from where the Head and Shoulder is initiated. The most important point here is the price gets bearish once it makes a breakout at the level of support drawn by the black line. This is the neckline of the Head and Shoulder. It may get difficult to find out since many sellers may wait for the price to have a bounce at the around the same level where the price produces its neck. As mentioned, this world is not perfect, neither the Forex market is. We often need to adjust in the market to trade. Today’s lesson is one of the examples of that.

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Forex Harmonic Forex Trading Guides

Harmonic Pattern Guide – Walkthrough

 Harmonic Pattern – Walkthrough
[caption id="attachment_48985" align="aligncenter" width="3682"] Bearish Butterfly Pattern against 180-degree Square of 9 angle.[/caption]

The chart above is the AUDJPY Forex pair on its 6-hour

 Harmonic Pattern – Walkthrough
[caption id="attachment_48985" align="aligncenter" width="3682"] Bearish Butterfly Pattern against 180-degree Square of 9 angle.[/caption]

The chart above is the AUDJPY Forex pair on its 6-hour

 Harmonic Pattern – Walkthrough

Bearish Butterfly Pattern against 180-degree Square of 9 angle.
Bearish Butterfly Pattern against 180-degree Square of 9 angle.

The chart above is the AUDJPY Forex pair on its 6-hour chart. If you are unable to identify this pattern without referencing notes or the prior articles, you are not ready to use this form of technical analysis. Regardless, the pattern above is a Bearish Butterfly Pattern.

Harmonic Patterns are by there very nature indicative of imminent price reversals. The PRZ (Potential Reversal Zone) is, in my opinion, the most critical level when determining whether to utilize a Harmonic Pattern in my trading. A Harmonic Pattern itself is not a sufficient enough form of analysis to decide whether or not to take a trade. Harmonic Patterns, in my opinion, should not be used as a primary form of analysis, but rather a complementary or confirmatory form of analysis. The chart above is an excellent example of this.

The horizontal levels on AUDJPY’s chart are derived from W.D. Gann’s Square of 9 – natural number values that represent angles. The methods and theories in Gann Analysis are an entirely different topic and require years of study and research – but for this article, one component of his work will help make my point. The red horizontal line at the top is a 180-degree Square of 9 angle. The 180-degree Square of 9 angle is already a strong and naturally powerful level of resistance. When I see price is near the 180-degree Square of 9 angle, I know one thing is for sure:

There is a high probability that the AUDJPY will have difficulty crossing this level and a high probability of price, at least initially, being rejected from moving higher.

So I would naturally look to be taking a short trade if the market shows rejection at that level. That is where the presence of a Harmonic Pattern is desirable. The Bearish Butterfly Pattern is one of the most reliable and most powerful reversal patterns in all Scott Carney’s work. I know that the Butterfly Pattern typically shows up at the end of a swing – not necessarily a trend, but the end of a swing. If I see a Bearish Butterfly Pattern, I know one thing is for sure:

The Bearish Butterfly Pattern is a reversal pattern. I also understand that the Bearish Butterfly Pattern appears at the top of a swing, indicating an extended and overdone market.

After seeing price approach, the naturally strong reversal level of the 180-degree Square of 9 angle, and then the completion of a Bearish Butterfly Pattern, I believe that there is a sufficient amount of analysis to risk taking a short trade. A short trade is further validated by the completion of a bearish engulfing candlestick, as well as some lengthily bearish divergence on the RSI.

 

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Forex Harmonic Forex Trading Guides

Harmonic Patterns – Start Here

Harmonic Patterns – Start Here

Harmonic Patterns are an advanced form of analysis and require more than a basic understanding of the technical analysis of financial markets. For those of

Bearish Butterfly Pattern against 180-degree Square of 9 angle.
Bearish Butterfly Pattern against 180-degree Square of 9 angle.

Harmonic Patterns – Start Here

Harmonic Patterns are an advanced form of analysis and require more than a basic understanding of the technical analysis of financial markets. For those of

Harmonic Patterns – Start Here

Harmonic Patterns are an advanced form of analysis and require more than a basic understanding of the technical analysis of financial markets. For those of you who have familiarized yourself with the application of Fibonacci levels, Harmonic Pattern Analysis will, perhaps, be of use to you. The following is a list of the Harmonic Patterns available for learning here at Forex Academy. The suggested order of learning about these patterns is below.

Phase One – Basic Harmonic Patterns

AB = CD

The Gartley Pattern

Phase Two – Advanced Patterns

The Butterfly Pattern

The Bat Pattern

The Alternate Bat Pattern

The Crab Pattern

The Deep Crab Pattern

The Shark Pattern

The Cypher Pattern

The 5-0 Harmonic Pattern

Phase Three – Application

Harmonic Pattern Walkthrough

The article above provides an example of how to use Harmonic Patterns in your own analysis and trading.

 

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley

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Forex Harmonic

The 5-0 Harmonic Pattern

Harmonic Pattern Example: Bearish 5-0 Harmonic Pattern
The 5-0 Harmonic Pattern
Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney

Harmonic Pattern Example: Bearish 5-0 Harmonic Pattern
The 5-0 Harmonic Pattern
Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney

Harmonic Pattern Example: Bearish 5-0 Harmonic Pattern

The 5-0 Harmonic Pattern

Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney revealed this pattern in his second book in his harmonic series, Harmonic Trading: Volume Two.

The 5-0 pattern is easily one of the wonkiest looking patterns. Depending on where you are at with your knowledge of harmonic patterns, the 5-0 will look foreign. And this is primarily because the 5-0 Pattern starts a 0. If you are used to seeing XABCD,  then 0XABCD will undoubtedly look odd.

5-0 Elements

  1. The pattern begins (begins with 0) at the beginning of an extended price move (direct quote from Carney’s work).
  2. After 0 has been established, an impulse reversal at X, A, and B must possess a 113 – 161.8% extension.
  3. The projection off of AB has a 161.8% extension requirement to C. C can move beyond the 161.8% extension but not beyond 224%.
  4. D is the 50% retracement of BC and is equal to AB (a Reciprocal AB=CD Pattern).
  5. The reciprocal AB=CD is required.

One of the best ways to interpret this pattern is to view it from an exasperated trader’s point of view. If we take the Bullish 5-0 Pattern as an example, then we can see why. The AB leg ends with B below X, creating a lower low. We then get an extended move in time where the BC leg is the most prolonged move with C ending above A. The movement from B to C may take on the appearance of a bear flag or bearish pennant. C to D shows intense shorting pressure and a belief among bears that new lows are going to be found. Instead, we get to D – the 50% retracement of BC. Instead of new lower lows, we get a confirmation swing creating a higher low. That move will more than likely generate a brand new trend reversal or significant corrective move.

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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Forex Harmonic

The Deep Crab Pattern

Harmonic Pattern Example: Bearish Deep Crab
The Deep Crab Pattern    
The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still

Harmonic Pattern Example: Bearish Deep Crab
The Deep Crab Pattern    
The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still

Harmonic Pattern Example: Bearish Deep Crab

The Deep Crab Pattern    

The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still has the endpoint (D) at the 161.8% extension of XA, but the AB=CD importance is a little different.

The most distinguishing component of this pattern is the importance of the specific 88.6% retracement point of B. Along with the Crab Pattern, the Deep Crab Pattern presents an especially extended and long move towards D.

Carney stressed that the Crab and Deep Crab represent significant overbought and oversold conditions, and reaction after completion is often sharp and quick. It is the opinion of many traders and analysts that the Crab Pattern and Deep Crab represent some of the fastest and profitable patterns out of all harmonic patterns.

Deep Crab differences from the Crab

  1. BC leg projection is not as extreme as the Crab.
  2. B must be at least an 88.6% retracement. Common to move more than 88.6% retracement level not above/below X (not above X in a Bearish Deep Crab and not below X in a Bullish Deep Crab).
  3. AB=CD pattern variations are more important in the Deep Crab Pattern.
  4. The BC leg is a minimum of 224% but can extend to 361.8%.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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Forex Harmonic

The Shark Pattern

Harmonic Pattern Example: Bearish Shark
The Shark Pattern
The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in

Harmonic Pattern Example: Bearish Shark
The Shark Pattern
The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in

Harmonic Pattern Example: Bearish Shark

The Shark Pattern

The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in his Harmonic Trading series, Harmonic Trading: Volume Three.

To gain a further understanding of the terminology used in this article, I would strongly encourage everyone to pick up all three of Carney’s books.

The Shark Pattern shares some of the more peculiar conditions that exist on some of the most extreme patterns. For example, both the 5-0 and the Shark Pattern are not typical M-shaped or W-shaped patterns. The Shark Pattern shows up before the 5-0 Pattern. It also shares a specific and precise Fibonacci level that the Deep Crab shares: The 88.6% retracement.

One behavior that might sound abnormal to all other harmonic patterns is that the reaction to the completion of this pattern is very short-lived. I think this is one of the most potent harmonic setups in Carney’s entire work because I am an intraday trader, and this pattern is very much for active traders.

Shark Pattern Elements

  1. AB extension of 0X must be at least 113% but not exceed 161.8%.
  2. BC extends beyond 0 by 113% of X0.
  3. BC extension of AX must be at least 161.8% but not exceed 224%.
  4. Because the Shark precedes the 5-0 Pattern, the profit target should be limited to the critical 5-0 Fibonacci level of 50%.

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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Forex Harmonic

The Cypher Pattern

The Cypher Pattern
The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by

The Cypher Pattern
The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by

The Cypher Pattern

The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by Scott Carney. Darren Oglesbee discovered this particular pattern.

This pattern is very similar to the Butterfly in both it’s construction and where it typically will occur (near the end of trends). However, the Cypher Pattern is a rare pattern and not one that shows up with a high amount of frequency. Don’t confuse rarity with being more powerful or profitable. I do not know enough about this pattern, nor have I had the opportunity to trade it enough to gauge it’s ‘power’ versus its peers. All I do know is that in the times I have traded it, its positive expectancy rate is high, no different than a Bat or Alternative Bat in my experience. The same goes for the Crab and Deep Crab, for that matter. Just like all of the other Harmonic Patterns that you will have learned about, the Cypher has specific rules and conditions that must be met for it to be a specified Cypher pattern.

Cypher Confirmation Conditions

  1. B must retrace to an expansive range between 38.2% and 61.8% of XA. At least 38.2% but not exceeding 61.8%
  2. C is an extension leg and moves beyond A – but must move to at least 127.2%, but it is normal for it to go as far as the 113% – 141.4%. It is considered invalid if it moves beyond the 141.4%
  3. CD leg should break the 78.6% level of XC.
  4. The PRZ (Potential Reversal Zone) of D is a wide range where the price must get to. Price can move anywhere between 38.2% to 61.8%.

I’ve created a simplified approach to how to ‘see’ this pattern.

Simplified Approach (Bullish Cypher)

  1. C must be higher than A.
  2. D must be less than B but greater than X.
  3. We should see a higher high (C > A) and a higher low (D > X).

Simplified Approach (Bearish Cypher)

  1. C must be less than A.
  2. D must be more than B but less than X.
  3. The same approach as above, reverse: lower high (D < X) and a lower low (C < A).

This pattern can be confusing (all harmonic patterns can be complicated), but in a nutshell, what we see happening with the Cypher pattern is the first pullback/throwback of a trend (B). After B, the small pullback/throwback of B occurs with the C leg. From a bullish perspective, when we see prices making lower highs and lower lows, but there is no follow-through shorting pressure, we should be on the lookout for some powerful and influential moves to occur in a very short period of time. It is not uncommon to see a bullish candle engulf several days of consolidation with this pattern.

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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Forex Harmonic

The Crab Pattern

The Crab Pattern
 

The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the

The Crab Pattern
 

The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the

The Crab Pattern

 

The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the extremely tight and resistance endpoint of 161.8% of the XA leg.

Like almost all harmonic patterns, the potential reversal in price action after this pattern has been complete is generally fast, violent and powerful. However, Carney gives special attention to this pattern and reports that it is usually the most extreme of all harmonic patterns.

The pattern is not as frequent as others due to its five-point extension structure. It is desirable to utilize an oscillator to filter entries of this pattern according to any divergence between price and your selected oscillator.

Crab Pattern Elements

  1. B must be a 61.8% retracements or less of XA.
  2. The BC projection can be quite extensive, generally 261.8%, 314%, or 3618%.
  3. An AB=CD 161.8% or an Alternate AB=CD 127% is required for the formation of this pattern.
  4. The extension of 161.8% of XA is the end limit of the pattern.
  5. C has an expansive range between 38.2% and 88.6%.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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Forex Harmonic

The Alternate Bat Pattern

Harmonic Pattern Example: Alternate Bat Bullish
The Alternate Bat Pattern
The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in

Harmonic Pattern Example: Alternate Bat Bullish
The Alternate Bat Pattern
The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in

Harmonic Pattern Example: Alternate Bat Bullish

The Alternate Bat Pattern

The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in his Harmonic Trading series of books. He discovered this pattern roughly two years after (2003) his discovery of the Bat Pattern (2001). Carney wrote that ‘the origin of the alternate Bat pattern resulted from many frustrated and failed trades of the standard framework. The standard Bat pattern is defined by the B point that is less than a 0.618 retracement of the XA Leg.’ Essentially, with the Alternate Bat Pattern we observe an extension beyond the 88.6% level at D, where D moves slightly below X (in a bullish Bat) or above X (in a bearish Bat). I view Alternate Bats as classic and powerful bear traps and bull traps. And they are just plain nasty if you find yourself thinking that a new low means further downside movement and a continuation lower – but instead to you get whipsawed by a massive reversal.

 

Alternate Bat Elements

  • Whereas the 88.6% retracement is nearly singular to the Bat Pattern, the Alternate Bat Pattern utilizes the 113% retracement of XA to determine the endpoint.
  • B must be a 38.2% or less retracement of XA.
  • Minimum projection of 200%
  • The AB=CD pattern must be an extended AB=CD and often is a 161.8% level.
  • The pattern is potent when using a form of divergence detection, such as the Composite Index, to confirm the pattern.

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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Forex Harmonic

The Bat Pattern

Harmonic Pattern Example: Bearish Bat
The Bat Pattern
The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney –

Harmonic Pattern Example: Bearish Bat
The Bat Pattern
The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney –

Harmonic Pattern Example: Bearish Bat

The Bat Pattern

The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney – found in Volume One of his Harmonic Trading series (I believe that Mr. Carney’s work is essential in your trading library).

I am particularly grateful to Carney’s work because it was his work that introduced me to a very powerful Fibonacci retracement level: 88.6%. Previously, I have followed Connie Brown’s suggestions in her various books utilizing only the 23.6%, 50%, and 61.8% Fibonacci levels – the 88.6% is now a near-constant in my own analysis and trading. That particular level, the 88.6% level, is the primary level to reach with the Bat pattern.

One of the key characteristics of this pattern is the strength, power, and speed of the reversals that occur after a confirmed and completed pattern is verified. As a Gann based trader, this is the pattern I personally look for to identify the ‘confirmation’ swing in a new trend (the first higher low in a reversing downtrend and the first lower high in a reversing uptrend).

Bat Pattern Elements

  1. B wave must be less than the 61.8% retracement of XA – ideally the 38.2% or 50%.
  2. BC projection must be at least 1.618.
  3. The AB=CD pattern is required and is often extended.
  4. C has an expansive range between 38.2% and 88.6%.
  5. The 88.6% Fibonacci retracement is a defining and particular level to the Bat Pattern.
  6. The 88.% D retracement is the defining and exact limit of the end of this pattern.

Ideal Bullish Bat Conditions

  1. 50% retracement of XA.
  2. Exact 88.6% D retracement of XA.
  3. BC wave 200%.
  4. Alternate AB=CD 127% is required.
  5. C should be inside the 50% and 61.8% retracement range.

Ideal Bearish Bat Conditions

  1. B wave must be less than the 61.8% retracement of XA – ideally the 38.2% or 50%.
  2. BC projection must be at least 88.6%.
  3. BC projection minimum of 161.8% with the max extensions between 200% to 261.8%.
  4. AB=CD is required, but the Alternate 127% AB=CD is ideal.
  5. C wave retracement can vary between the 38.2% to 88.6% retracement levels.

 

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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Forex Harmonic

The Butterfly Pattern

Butterfly Harmonic Pattern Example: Bearish Butterfly
The Butterfly

The Butterfly pattern is a harmonic pattern discovered by Bryce Gilmore. Gilmore is the author of Geometry or Markets (now in its

Butterfly Harmonic Pattern Example: Bearish Butterfly
The Butterfly

The Butterfly pattern is a harmonic pattern discovered by Bryce Gilmore. Gilmore is the author of Geometry or Markets (now in its

Butterfly Harmonic Pattern Example: Bearish Butterfly

The Butterfly

The Butterfly pattern is a harmonic pattern discovered by Bryce Gilmore. Gilmore is the author of Geometry or Markets (now in its 4th Edition, initially published in 1987)– a must-read for those interested in harmonics patterns. He is the creator of his proprietary software called WaveTrader. The Butterfly is one of the most potent harmonic patterns because of the nature of where it shows up. Both Carney and Pesavento stress that this pattern typically shows the significant highs and significant lows of a trend. In fact, in utilizing multiple time frame analysis, it is not uncommon to see several Butterfly patterns show up in various timeframes all at the end of a trend (example: the end of a bull trend can show a bearish butterfly on a daily chart with a 4-hour and 1-hour chart showing a bearish butterfly ending at the same time). This pattern is an example of an extension pattern and is generally formed when a Gartley pattern (the Gartley Harmonic pattern) is invalidated by the CD wave moving beyond X. From a price action perspective, this is the kind of move where one would ‘assume’ a new high or low should be established, but extreme fear or greed takes over and causes prices to accelerate in both volume and price to end a trend.

Failure, Symmetry, and Thrust

Pesavento identified three crucial characteristics of the Butterfly pattern.

Thrust – C should be observed as an indicator of whether a Gartley or Butterfly pattern will form. He indicated specific Fibonacci levels that are important for gaps – but that is important for equity markets that are rife with gaps. That is not important for us in Forex markets (gaps in Forex are rare intra-week and typically form only on the Chicago Sunday open, Forex also has an extremely high degree of gaps filling). He noted that thrusts out of the CD wave point to a high probability of new 161.8% extensions rather than a 127.2% extension.

 

Symmetry – The slope of the AB and CD wave in the AB=CD should be observed strictly. Depending on how steep the angle is on the CD wave, this could indicate a Butterfly pattern is going to be formed. Pesavento also noted that the number of bars should be equal (10 bars in AB should also be 10 bars in CD). Regarding the steepness of the CD wave, this is where Gann can become instrumental. In my trading, and depending on the instrument and market, I utilize Gann’s various Squares (Square of 144, Square of 90, Square of 52, etc.). If you use a chart that is properly squared in price and time, there is very little ambiguity involved in identifying the speed of the slope of a CD wave.

 

Failure Signs – Very merely put, Pesavento called for close attention to any move that extends beyond the 161.8% XA expansion. And this is an excellent point because one of the most dangerous things we can do as traders is an attempt to put to much weight on a specific style of analysis. It’s easy to think, ‘well, the Butterfly pattern is strong, so if it completes that must be the high or low.’ That is a very foolish and dangerous assumption to make. When markets, even Forex, make new highs or lows in their respective trends, that is generally a sign of strength. So while the Butterfly pattern does indicate the end of a trend – common sense confirmation is still required. The Butterfly pattern should help confirm the end of a trend, not define it.

 

The Five Negations

Continuing on with the great work of Pesavento and Jouflas, they identified five conditions that would invalidate a Butterfly pattern:

  1. No AB=CD in the AD wave.
  2. A move beyond the 261.8% extension.
  3. B above X (sell) or B below X (buy).
  4. C above A or C Below A, respectively.
  5. D must extend beyond X.

 

Ideal Butterfly Pattern Conditions

Carney identified six ideal conditions for a Butterfly pattern. You will note that the combination of Pesavento and Jouflas’s work greatly compliments Carney’s.

  1. Precise 78.6% retracement of B from the XA wave. The 78.6% B retracement is required.
  2. BC must be at least 161.8%.
  3. AB=CD is required – the Alternate 127% AB=CD is the most common.
  4. 127% projection is the most critical number in the PRZ (Potential Reversal Zone).
  5. No 161.8% projection.
  6. C should be within its 38.2% to 88.6% Fibonacci retracement.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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Forex Harmonic

The Gartley Pattern

Harmonic Pattern: Bearish Gartley

The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability

Harmonic Pattern: Bearish Gartley

The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability

Harmonic Pattern: Bearish Gartley

The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability remains exceptionally resilient. This is especially true when we consider how old the pattern is and how it has remained profitable in these contemporary trading environments. Pesavento reported (at least I think he was the one who wrote this statistic) that it is profitable seven out of ten times and has remained that way for over 80 years. It is important to remember that all harmonic patterns have stringent ruleset. There is no room for interpretation in the construction of any pattern, and the Gartley pattern is no different.

Rules

  1. D cannot exceed X.
  2. C cannot exceed A.
  3. B cannot exceed X.

Characteristics

  1. X is the high or low of a swing.
  2. It is impossible to project or determine A.
  3. Main Fibonacci levels are 38.2%, 50%, 61.8% and 78.6%.
  4. Precise 61.7% retracement XA for B.
  5. BC projections have two specific Fibs: 127% or 161.8%.
  6. The BC projection must not exceed 161.8%.
  7. Symmetrical AB=CD patterns are frequent.
  8. C retracement has a wide range between 38.2% and 88.6%.
  9. An exact D retracement is 78.6% of the XA move.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley

Categories
Forex Harmonic

AB=CD Pattern

AB=CD Pattern
[caption id="attachment_42589" align="aligncenter" width="1530"] Bearish AB=CD Harmonic Pattern[/caption]

[caption id="attachment_42590" align="aligncenter" width="1530"] Bullish AB=CD Harmonic Pattern[/caption]

The AB=CD Harmonic Pattern is the most basic and common

AB=CD Pattern
[caption id="attachment_42589" align="aligncenter" width="1530"] Bearish AB=CD Harmonic Pattern[/caption]

[caption id="attachment_42590" align="aligncenter" width="1530"] Bullish AB=CD Harmonic Pattern[/caption]

The AB=CD Harmonic Pattern is the most basic and common

AB=CD Pattern

Bearish AB=CD Harmonic Pattern
Bullish AB=CD Harmonic Pattern

The AB=CD Harmonic Pattern is the most basic and common pattern in harmonic geometry. It is the building block of all other patterns. It is the ‘bread and butter’ pattern. Pesavento and Carney recommended that this pattern should be learned first – and reading this article does not qualify for having learned this pattern. Like any form of analysis, you will need to regularly and consistently train your brain and eyes to find this pattern. You won’t be able to get very far in the study of harmonic patterns until you can see this pattern just by glancing at a chart.

Rules

  1. BC cannot exceed AB.
  2. D must exceed B to form a completed AB=CD pattern.

Characteristics

  1. CD is an extension of AB, generally from the Fibonacci ratio of 1.27% to 2.00%.
  2. CD’s slope is steep or longer/wider than AB.
  3. BC often corrects to the Fibonacci ratios of 38.2%, 50%, 61.8%, or 78.6%.

 

AB=CD Pattern Reciprocal Ratios

Point C Retracement BC Projection
38.2% 24% or 261.8%
50% 200%
61.8% 161.8%
70.7% 141%
78.6% 127%
88.6% 113%

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley

Categories
Forex Harmonic

Harmonic Geometry

Gartley Harmonic Pattern Example: Cipher Pattern
Harmonics – Gartley Geometry
Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method

Gartley Harmonic Pattern Example: Cipher Pattern
Harmonics – Gartley Geometry
Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method

Gartley Harmonic Pattern Example: Cipher Pattern

Harmonics – Gartley Geometry

Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method that draws new traders to it more than Gartley Harmonics. People see these wonky triangles on a chart and automatically assume that because it looks so complicated and esoteric, they should probably learn these patterns right away. If that sounds like yourself, stop reading the remainder of this article and come back once you have learned the fundamentals of technical analysis. And certainly, don’t implement a new and complicated form of technical analysis like that harmonic geometry you’re your trading until you can look at a chart and tell what patterns exist just by glancing at it. Folks – I need to repeat this: Harmonic Geometry takes time to learn – this isn’t like learning about support and resistance. It’s not a topic that you can read about, understand, grasp, and learn in one weekend and then implement into your trading. The best way I could explain the time it takes to learn Carney’s harmonic structures is comparing it to the time it takes for a person to be able to look at a chart using the Ichimoku Kinko Hyo system and know, just by looking, if a trade can be taken and what the market is doing. That’s the best comparison I can find. Until you can look at a chart and within 10-20 seconds identify an important harmonic pattern on that chart – without having to draw it – then you should not use this in your trading. You need to become an expert in the analysis part before you start to trade with it.

I believe we should be calling these patterns Carney Harmonics or Gilmore Harmonics because Gartley never gave a name any designs – the genius work Bryce Gilmore and Scott Carney did that in his various Harmonic Trader series books. Scott Carney is the man who discovered and named a great many patterns and shapes that we see today. And Carney’s work is some of the most developed and contemporary work of Gann’s and Gartley’s that exists today. But the understanding and application of Carney’s and Gilmore’s patterns have been woefully implemented by many in the trading community. Any of you reading this section or who were drawn to it because of the words ‘harmonic’ or ‘Gartley’ must do two things before you would ever implement this advanced analysis into any trading plan:

  1. Read Profits in the Stock Market by H.M. Gartley – this is the foundation of learning and identifying harmonic ratios.
  2. Read Scott Carney’s Harmonic Trader series: Harmonic Trading: Volume 1, Harmonic Trading: Volume 2, and Harmonic Trading: Volume 3.

There are a series of other works by expert analysts and traders that address Gartley’s work and are worth reading, such as Pesavento, Bayer, Brown, Garrett, and Bulkowski. Do not consider their work merely supplementary – I find their work necessary to fully grasp the rabbit hole you are attempting to go down. Harmonic Patterns are an extremely in-depth form of analysis that encompasses multiple esoteric and contemporary areas of technical analysis. If you think finding the patterns and being able to draw them is sufficient to make a trading plan, you will lose a lot of money. Additionally, some words of wisdom from the great Larry Pesavento: An understanding of harmonics requires an in-depth knowledge of Fibonacci.

Harmonic Geometry, in a nutshell

In a nutshell, Harmonic Geometry is a study and analysis of how markets move and flow as a measure of proportion from prior price levels. These proportional levels are measured using Fibonacci retracements and extensions. When these patterns (triangles) complete, they create powerful reversal opportunities. Carney calls the end of these patterns PRZs – Potential Reversal Zones. The significant error that many new traders and analysts make when they find a complete pattern is the same problem many new traders make with any new tool, strategy, or method: they don’t confirm. Make no mistake: Harmonic Patterns are powerful. But like any analysis or tool, it is not sufficient to take a trade. Harmonic Pattern analysis is just one tool in your trading toolbox. And like any toolbox, you need multiple tools to tackle the various projects and goals you want to achieve.

Harmonic Trading Ratios

Contrary to popular belief, Gartley did not utilize Fibonacci levels or ratios in his work. Nonetheless, harmonic ratios are based on three classifications of harmonic ratios: Primary Ratios, Primary Derived Ratios and, Complementary Derived Ratios. As you develop a further understanding of the various patterns and their ratios, you will come to appreciate the very defined structure of this type of technical analysis.

Primary Ratios

  • 61.8% = Primary Ratio
  • 161.8% = Primary Projection Ratios

Primary Derived Ratios

  • 78.6% = Square root of 0.618
  • 88.6% = Fourth root of 0.618 or Square root of 0.786
  • 113% = Fourth root of 1.618 or Square root of 1.27
  • 127% = Square root of 1.618

Complementary Derived Ratios

  • 38.2% = (1-0.618) or 0.618 squared
  • 50% = 0.707 squared
  • 70.7% = Square root of 0.50
  • 141% = Square root of 2.0
  • 200% = 1 + 1
  • 224% = Square root of 5
  • 261.8% = 1.618 squared
  • 314% = Pi
  • 361.8% = 1 + 2.618

Elliot Wave and Harmonic Geometry

Ellioticians are very aware of the strong connectedness that Gartley’s and Carney’s work has within Elliot Wave Theory. There are significant elements between the two types of technical analyses that create a mutual symbiosis. However, while they are very similar, it is crucial to understand that there are some significant differences between the two.

Elliot Gartley
Dynamic, Flexible. Static, Definite.
Wave counts are more fluidly labeled. Each move is labeled either XA, AB, BC, or CD.
Many variations and intepretations No variation permitted.
Wave alignment varied and malleable. Each price point alignment must be exact.

The combination of Elliot and Gartley is powerful, and Gartley Harmonics can help confirm Elliot Waves. The following articles will describe, in further detail, specific Harmonic Patterns.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley

Categories
Forex Harmonic

Harmonic price levels based on Music Theory

One of the most mind-boggling books regarding technical analysis and W.D. Gann was Tony Plummer’s book, The Law of Vibration – The Revelation of William D. Gann. It is easily

One of the most mind-boggling books regarding technical analysis and W.D. Gann was Tony Plummer’s book, The Law of Vibration – The Revelation of William D. Gann. It is easily

One of the most mind-boggling books regarding technical analysis and W.D. Gann was Tony Plummer’s book, The Law of Vibration – The Revelation of William D. Gann. It is easily one of the most enthralling and contemporary works for any Gannyst out there. Without going into extreme detail of the book, I want to focus on one part of this book that I found particularly interesting: Harmonics in Music. Back in the day, yours truly was a double-major in both music education and music performance (I was a Euphonium player – also the Trombone and Tuba). Anyway – on to the awesomeness of this article.

I want to stress that in the book, the author does not tell you how to apply the information into your trading or how to apply it on a chart. I think that is an homage of sorts to Gann himself (Gann also was very ‘cryptic’ about how to use his methods).

But I’m pretty sure I figured it out.

The Law of Three and Middle C

The opening of Chapter 6 in Plummer’s book begins with a quote from P. D. Ouspensky: “A study of the seven-tone musical scale gives a very good foundation for understanding the cosmic of octaves.” Plummer writes that Western music is based on a series of notes centered around the Middle C (The middle note of C on a keyboard, labeled C4). The Middle-C vibrates at a rate of 256 cycles per second. And one octave above that is the next C, C5. The rate of vibration of C5 is double that of Middle-C: 512.

In music, a scale is made up of 8 notes. In Music Theory and Aural Theory, or if you’ve watched The Sound of Music, you’re probably familiar with the song Do Re Mi. Do Re Mi is called solfege, or tonic solfa. The words: Do, Re, Mi, Fa, So, La, Ti, and Do represent the eight notes in a scale. And each one of those notes has its own rate of vibration. Here’s the table:

musicalharmonics

I’ve spent considerable time studying not only Gann’s own work, but also the work of Michael Jenkins, Constance Brown, George Bayer, James Hyerczyk, and others. One of the things I’ve learned from these Gann experts’ work was Gann’s use of Harmonics, which seems to be a broad term for calculating important price levels. There are various methods used that generally come to the same value area. Some of those methods are Gann’s Square of 9, Square of 24, natural squared numbers and others. Probably one of the most popular methods from the 1990s was a system called Murray Math. Murray simplified the application of harmonic ranges in both time and price. It’s useful, but not as accurate.

I’ve used a number of methods to apply Gann’s harmonics, and Plummer’s ratios have probably been the most effective. There is a piece of software called Optuma by Market Analyst. They actually have a tool that creates exactly what I figured out on my own. So it was pretty damn cool to use that software and see that I had come across a solution and application all on my own and have it confirmed by software created by people way smarter than me.

How I applied it

Using the vibrational number of 256, it’s easy to double that value and then double again. So 256, 512, 1024, 2048, etc, etc etc. These numbers, for whatever reason, appear everywhere in science and nature. Now, you can use these numbers for any type of stock, futures contract, forex pair or cryptocurrency. Here are some examples. Notice how much these zones act as support and resistance and how often prices trade within these zones.

Chart Examples

AUDUSD

AUDUSD

This AUDUSD chart is from using Optuma by Market Analyst. The harmonic values are starting at the octave of 65536 to 131072. I converted the 131072 to 1.31072. 65536 was converted to 0.65536.

XAUUSD (Gold)

XAUUSD

EURUSD

EURUSD

BTCUSD

BTCUSD

ETHUSD

ETHUSD

LTCUSD

LTCUSD

The rest of the images above are from Tradingview. I created a simple indicator that will plot out the lines depending on division or multiple of 256 that you want to use. You simply add the number you wish to, and it will plot out a full Octave from Do to Do.