But instead, they form a nice price confluence zone for the pattern completion. Since the inception of the original harmonic patterns, many additional patterns have emerged within the trading community. Because the Elliott wave principle is one of the earliest pattern trading methods which is still widely in use, even today. The price reversal zone is labeled as the “Potential Reversal Zone” (PRZ) which defines the area where the pattern completes and the Fib ratios converge.

There is a special Gartley pattern defined with precise ratio confluence. This particular pattern is called the perfect Gartley pattern, simply because of the perfect and precise Fibonacci ratio alignment. Right off the bat, there’s a warning sign that is screaming out loud! If the CD leg is an impulse, then any reversal trade must be handled with great caution. The patterns that comprise 5 price points are labeled as XABCD and they consist of 4 price waves – XA, AB, BC, and CD. This is why Scott subtitled his book “profiting from the natural order of financial markets”.

## Building an Algorithmic Trading Strategy using Reinforcement Learning

The real power of harmonic patterns is when multiple Fib ratios align to form a confluence zone. “The Harmonic Trader” introduced this potential reversal zone (PRZ) concept. The price action trading domain can be made significantly deeper by taking a look at the advanced trading method bitbuy canada review known a ‘harmonic trading’. The harmonic trading method identifies key reversal zones using price patterns, which forecast possible trade entry or exit levels. The bat pattern provides the best risk-to-reward ratio because the PRZ limit is defined by an 88.6% retracement of the XA leg.

- Crab patterns mostly appear in corrective channels regressing against the direction of the predominant main trend.
- The price reversal zone is labeled as the “Potential Reversal Zone” (PRZ) which defines the area where the pattern completes and the Fib ratios converge.
- PRZ is the zone to look for possible trade opportunities in the opposite direction of the last leg that completes the pattern.
- In the bearish setup, the XA leg is downwards, hence the trade call is for a short trade.
- The Fibonacci sequence is evident in nature all around us, thus giving context to the above phrase.

The minimum BC projection is 1.618, so the price has room for a deep retracement of the XA leg. However the last point above – “the concept of impulse and corrective wave” drives it home. This is the key to mastering and executing any trading strategy that involves price patterns. The concept of impulse and the corrective wave is a major similarity between Elliott waves and harmonics.

## Founder, HarmonicTrader.com

Harmonics is the process of identifying the market’s rhythm or its pulse and exploiting its trading opportunities. They provide us with visual occurrences that have tendencies to repeat themselves over and over again. As time passed by, the popularity of the Gartley pattern grew and traders came up with their own variations. Scott M Carney and his harmonic trading were among the most popular and successful. This knowledge of alternating phases of the market becomes very useful in pattern trading, especially when the pattern is utilized for reversal trades. The usual butterfly structure must have a BC projection between 1.618 and 2.24.

## The Bat Pattern

For all traders that are interested in trading Harmonic patterns, I strongly recommend the works of Mr. Carney. It is absolutely essential that you read them (at least the first volume) before you begin trading. The Butterfly is similar to the Gartley pattern and PRZ zone is defined by a mandatory retracement of the XA leg as the point. The ideal Butterfly has 0.786 as XB but traders might also use different measurements such as 0.952 of the XB.

The Fibonacci sequence is evident in nature all around us, thus giving context to the above phrase. This misalignment is the real beauty of it because that provides the gorgeous PRZ zone to confirm the pattern and then enter or exit a trade. Think of the time contexts in terms of moving averages – e.g. 100-period ma and 20-period ma.

Because the impulse-correction-impulse structure is the fundamental component of both pattern-trading methods. A well-defined PRZ usually provides some type of initial reaction on the first test of most harmonic patterns. The initial test can occur quickly and on high volatility it can immediately reject the price. This methodology assumes that trading patterns or cycles, like many patterns and cycles in life, repeat themselves. The key is to identify these patterns and to enter or exit a position based on a high degree of probability that the same historic price action will occur.

## Trade Management in Harmonic Trading

The Bat is a very accurate pattern, usually requiring a smaller stop-loss than most patterns. The pattern incorporates the powerful legacy fx review 0.886 XA retracement as the defining element in the PRZ. Traders opt for buy/sell at point D, depending on the pattern direction.

The Fibonacci retracements and projections of various legs of a harmonic pattern never align up to the pip. Out of all harmonic patterns, the Butterfly structure has the deepest B midpoint retracement of the XA leg. This usually occurs due to price retesting the support or resistance price levels with momentum and force. Crab patterns mostly appear in corrective channels regressing against the direction of the predominant main trend. The Bat pattern commonly appears at significant price levels of support and resistance.

## The Crab Pattern

Harmonic patterns are defined by specific price structures, quantified by Fibonacci calculations. These patterns represent price structures that contain combinations of distinct and consecutive Fibonacci retracements and projections. Harmonic price patterns are defined by a sequence of retracements and projections using Fibonacci ratios, thus providing specific price points to look for trade opportunities. The concept of PRZ is used with harmonic patterns that consist of 5 price points (XABCD). If we calculate various Fibonacci aspects of a specific price structure, we can identify harmonic pattern areas that will hint for potential turning points in price action. Scott M. Carney has identified those reversal spots as PRZ — The Potential Reversal Zone.

In fact, in the context of visual structure, there is very little difference from the Gartley pattern as we know it today. Furthermore, the price boundaries of the zone clearly define where a pattern is still valid. While precision does provide an objective approach to trading with the possibility of set-and-forget trades, it can also lead to a completely mechanical fxdd forex broker review mindset. Which of course, can work against you, thus this particular sword would cut both ways. Carney introduced a unique position management system based on a 0.382 Trailing Stop, measured from the reversal point to the reversal extreme. I can give you additional profit management tips that should help you understand targets and stops even better.

The idea is to have the reversal trade in the direction of the longer-term predominant wave. In the perfect Gartley pattern PRZ is defined by a narrow zone between 1.441 and the 1.618 BC projection. As opposed to the Bat and Gartkey, the final leg projection of the Crab pattern extends beyond the starting point – X of the pattern. Bat and the Gartley patterns are the most popular of them all because they both revolve around the “golden ratio” for the sequence of retracements. If you have come across harmonic trading before, you probably do. It is the level which indicates the price drop during the AB decrease.

When speaking of price patterns, the Elliott wave theory has a prominent place. Fibonacci retracement levels have been used in trading for a long time. Except for the Elliott wave theory, no other trading method provided an organized and objective usage of the Fib ratios.