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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 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.

Categories
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 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 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 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.

Categories
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 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.

Categories
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 – 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.

Categories
Forex Harmonic

AB=CD Pattern

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 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