Harmonic Trading Strategies
and Patterns Explained
Developing a trading strategy using Harmonics.
Harmonic trading is a beautiful blend of geometry and Fibonacci numbers, specifically with the ‘golden ratio’.
We can find the latter in much of the natural world, like flower petal designs, tree branches, spiral galaxies, snail shells, and even the human body.
This phenomenon is also present in the financial markets, fitting perfectly with its cyclical, repetitive nature.
Traders use harmonic patterns to predict turning points with great accuracy and highly defined profit targets.
Harmonics are certainly for the most advanced chartists compared to other trading patterns.
That’s why this will be a detailed guide to this staple of technical analysis.
Grab a coffee, settle in and let’s explore…
Table of Contents
Harmonics Patterns: An Introduction
Harmonic trading involves geometry-based chart patterns that use specific Fibonacci ratios to locate precise turning points.
This charting style first came about in 1935 from the ‘Profits in the Stock Market’ book authored by Harold M. Gartley. (Currently £350 on Amazon…)
The book introduces the most basic harmonic pattern named after the author: the ‘Gartley.’
Another writer who has contributed to trading with harmonic patterns is Scott Carney. ‘The Harmonic Trader’ book volumes gave way to several well-known harmonic patterns, like the ‘crab,’ ‘bat,’ and ‘shark.’ Identifying these formations means being well-versed with the Fibonacci retracement tool and its extensions.
It’s time for a quick history lesson…(I know I know, but stick with it to understand the roots!)
Fibonacci refers to the Italian math wizard of the Middle Ages, Leonardo Bonacci.
He came out with a manuscript named ‘Liber Abaci’ (or The Book of Calculation) in 1202. This is where the famous Fibonacci series came to light.
It’s simply a sequence of numbers where each is the total of the previous two: 1,1,2,3,5,8,13,21,34, 55, 89, etc.
The magic lies between these numbers where we find the ‘divine proportion’ or ‘golden ratio.’
It refers to the fact that each figure in the series is about 1.618 higher than the preceding number.
For instance, dividing 55 by 89 equals 1.618; 21 divided by 34 gives an answer of 1.619; 13 by 18 is 1.625, and so on.
0.618 or 1.618 aren’t the only magical Fibonacci numbers in the series. Other ratios include 0.38 (or 1.382), 0.236 (or 1.236), and more.
The Fibonacci retracement tool is the most basic and contains these ratios:
- 0.236 (or 23.6%)
- 0.382 (or 38.2%)
- 0.5 (or 50%)
- 0.618 (or 61.8%)
- 0.786 (or 78.6%)
- 1 (or 100%)
Meanwhile, Fibonacci extensions add more lines to the retracement tool that signify future support and resistance levels.
That’s why they are multiples of retracements e.g., 1.236, 1.382, 1.50, 1.618, etc.
The fib extension tool is also quite useful for deciding where to bank your profits (as we’ll see in later examples).
Fibonacci retracements and extensions
Some traders prefer to use special indicators or scanners to spot these patterns.
The main downside is that some software, especially if it’s free or cheap, may not be accurate. You may choose this route, but double-check the harmonic ratios by drawing the Fib yourself once the pattern completes.
Meanwhile, others stick to the more time-consuming method of plotting each retracement, which is usually more precise.
Here, it’s crucial to know the exact Fibonacci ratio relationships when you draw harmonic patterns.
Patience is also key for harmonics. Given their rarity, traders should always take their time before confirming and trading.
The Different Types of Harmonic Patterns
It’s worth noting that most harmonic patterns are quite similar.
However, traders can tell one from another using the appropriate Fibonacci ratios.
Let’s take a look at the most popular of these formations, looking at the different points and where to potentially place your buy or sell order.
The ABCD pattern
This is the easiest harmonic pattern because it has four points (while the others have 5). The AB leg and CD leg are nearly the same length and angle, acting as impulsive legs before the turning point. Think of the ABCD as a ‘zig-zag’ or ‘thunderbolt.’ (cool name)
Fortunately, the main Fibonacci retracements to learn here are:
- AB is 61.8% of BC
- The CD line is 127.2% of AB
Experts suggest traders can have their entry orders at point D (called the potential reversal zone). Alternatively, you can wait until the pattern is complete and enter at the D point. Traders should have their stop above D, and aim for at least C (or further) for their TP/take profit.
The Gartley Pattern
It’s only fitting to look at another relatively easy pattern, the Gartley, also known by other names like the ‘Gartley 222’ or ‘222.’ This is because it appears on the 222nd page of Gartley’s ‘Profits in the Stock Market’ book.
The Gartley is a five-point or XABCD formation. It resembles an ‘M’ shape (for the bullish Gartley pattern) or a ‘W’ shape (for the bearish Gartley pattern). Here are the Fibonacci numbers to learn when you plot the Gartley:
- XA can start from anywhere
- AB is 61.8% of XA
- BC is between 38.2% to 88.6% of AB
- CD is either 127.2% or 161.8% of BC
- AD is 78.6% of XA
Your entry is at the D point (with your stop loss at X or further below or above). Meanwhile, the profit target should be at C or further.
The Cypher Pattern
The cypher was discovered by Darren Oglesbee and shares many visual traits with the butterfly. But here are the unique Fibonacci numbers to consider for this pattern:
- XA can start from anywhere
- AB is 38.2% to 61.8% of XA
- BC is 127.2% to 141.4% of XA
- CD is at least 78.6% of XC
You should enter at point D (with your stop loss at X or further). The profit target should be at C or greater.
The Bat Pattern
The ‘bat’ is one of the popular five-point harmonic trading patterns Carney introduced in the first 1999 edition of his influential book. The bat pattern looks quite similar to the Gartley, except it has different Fibonacci retracements. Here they are:
- XA can start from anywhere
- AB is 38.2% to 50% of XA
- BC is between 38.2% to 88.6% of AB
- CD is a 168.2% to 261.8% extension of A
- BD is 88.6% of XA
Your entry is at point D (with your stop loss at X or further below or above). Meanwhile, the profit target should be at C or further.
The Crab Pattern
The crab pattern is another of Carney’s creations with a longer CD compared to the bat harmonic pattern. As with the other formations, it also has an XABCD sequence. Here are the Fibonacci ratios to know:
- XA can start from anywhere
- AB is 38.2% to 61.8% of XA
- BC is 38.2% to 88.6% of ABC
- The CD line is 161.8% of XA (In rare cases, CD can be a 224.0% to 361.8% extension of BC)
Your entry is at the D point (with your stop loss above or below D). Meanwhile, the profit target should be at C or longer distance.
The Shark Pattern
The shark pattern, also the brainchild of Carney, was first used in 2011. Its name comes from the steep outside lines and smaller middle dip resembling a shark. Traders label the five points as O, X, A, B, C instead of X, A, B, C, D.
Here are the Fibonacci retracements to note with the shark pattern:
- OX can start from anywhere
- AB is 113% to 1.61.8% of XA
- BC is 161.8% to 224% of AB
- BC is 88.6% to 113% of OX
Your entry is at point C (with your stop loss above or below point C). Meanwhile, the profit target should be at B or greater.
The Butterfly Pattern
Bryce Gilmore and Larry Pesavento are credited with inventing the butterfly pattern. This is a typical five-point harmonic formation that looks similar to the others. You just have to know the right Fibonacci ratios:
- XA can start from anywhere
- AB is 78.6% of XA
- BC is 38.2% to 88.6% of AB
- CD is 1.618% to 2.618% of AB (or 127.0% to 161.8% of XA)
Likewise, your entry is at the D point (with your stop loss above or below D). Meanwhile, the profit target should be at C or greater.
How do you Identify Harmonic Patterns?
As mentioned earlier, there are two ways to identify these trading patterns.
The manual method is the most time-consuming but still preferred for skilled traders.
Given the many different harmonic patterns, much of the charting involved here is trial and error. With experience, some formations may become second nature to the naked eye.
Still, you will need to confirm by drawing with your chart lines and Fib retracements.
The second option is, of course, using special harmonic ratios recognition software or indicators.
The free scanners are not the best due to their inaccuracies. So, a serious harmonic trading specialist may consider paying for the software monthly or yearly if it’s affordable.
Proper scanners can scan harmonics across all time frames and markets, notifying the trader of emerging patterns in real time.
Key Considerations Before Trading Harmonic Patterns
Like any trading strategy, there is much to consider before exploring any of the popular harmonic patterns.
Market Context Conditions
Like other technical analysis tools, traders shouldn’t treat harmonics as the be-all and end-all. They can be a confirmation factor under the right conditions. This is why like all setups and trading strategies, understanding the market context is key.
Most traders begin by looking at the overall trend. Is it up, down, or ranging?
Harmonic trading patterns can work well for reversals and trend continuation.
Other questions traders may ask themselves:
- Is the market near an obvious supply or resistance level?
- Is there clear, supporting price action in the potential reversal zone?
- Are the fundamentals aligning with the trader choosing a long or short position?
- Is there multi-time frame alignment?
- If you are using technical indicators, what are they saying about the market’s momentum, volume, or volatility?
So, by mapping out the context and combining other signals, any harmonic chart pattern can yield excellent results.
Trade Entries and Stops
There are no hard and fast rules for entries and stops when trading harmonic patterns.
The price will not always move smoothly from the reversal zone.
So, traders shouldn’t necessarily panic with any retracements. This is where proper trade management comes into play.
The same goes for stops.
There isn’t a specific rule of how far above or below the C point or point D.
It’s always better to be a little wide than tight with your stops IMO.
Ultimately, a harmonic trader should observe their general risk-to-reward parameters for guidance. Likewise, choosing where to take profits will vary from one person to another.
This is where our good friend Fibonacci extensions can help.
Real-life Examples of Harmonic Chart Patterns
Are harmonic patterns profitable?
Well, let’s look at several harmonic chart patterns across different financial markets to find out. (yes we have to be careful not to add too much hindsight bias here, but it’s good for illustration purposes)
Our first chart is good ol’ Bitcoin with a nice bullish bat pattern.
Looking at the image below, it’s clear BTC is in an uptrend on the daily chart. There are two touches in a key $25,000 support/resistance area, as noted by the two arrows.
What’s vital about this example is what was mentioned earlier.
The price didn’t immediately move from point D, meaning this harmonic chart pattern would have been valid. The ellipse shows the price action around the $25,000 level, typical of a strong support area. It’s close to the X mark, which is usually the best place for your stop loss.
Given this was the daily chart, it’s normal for this time-consuming activity to happen. We see that BTC eventually continued its uptrend.
Also, note the Fib extension tool. Traders could have used the 161.8% or 261.8% levels for their take-profit (TP) references.
The next example is a bearish butterfly harmonic pattern on the 4HR chart of USD/ZAR. Similar to Bitcoin, we see a decent resistance zone at R19.20, where the formation appeared.
Of note here is that this butterfly didn’t go a long distance. As with any pattern, traders should expect these moments.
But with an adequate trade management plan, some profits can be secured if that’s how you want to play it.
Next up is a bearish Gartley on the weekly chart of the MicroStrategy stock (MSTR).
Here, we have a clear uptrend before the Gartley, leading to the reversal.
With little context, traders may have chosen two entry techniques.
The first riskier option would be entering at D with a stop loss at the $226.48 high.
Alternatively, another trader could have waited for the trend line break to confirm the price drop (with a stop loss at D). We see here that the price broke out strongly.
This trade demonstrates the Fib extension tool mapping out TP targets. Nice.
What is the Best Harmonic Pattern to Trade?
Carney has stated that the crab pattern is the best or most reliable harmonic.
But really, the answer is more subjective.
Harmonics trading strategies use patterns that are very much alike, mostly rooted in reversals.
Like any pattern, the success depends on other factors or context surrounding it. Context context context!
This is especially true with trading reversal points which is much harder than trend trading.
What is the Best Time Frame for Harmonic Trading?
The naturally long period it takes for harmonic patterns to form means higher time-frames are the best for identifying them.
You should be looking at any chart from the 1HR chart and above (i.e., 4HR, daily, weekly, monthly).
The idea of higher time frames being more reliable than others applies to any strategy, including trading harmonic patterns.
It has to do with ‘noise’ in the markets.
This simply describes erratic short-term volatility that is common on lower time-frames.
So, choosing to trade harmonic patterns on higher charts is a way to filter the ratio. But you should know that the higher you go, the lower the quantity.
Summary
All in all, the Fibonacci geometric shapes of harmonics continue to have a loyal following of skilled traders.
How they form under specific rules makes them highly accurate. You are better off relying on a rare pattern than something that forms daily.
But as with anything related to technical analysis, harmonics have their flaws.
The most notable is that they are not beginner-friendly and can take much time to identify without a proper scanner or indicator.
Finally, traders should expect these price patterns to fail. As stated earlier, market context, combining other signals, and the right trade management make a world of difference.
Other Harmonic trading strategies and patterns resources
An interesting video on Harmonic patterns with Scott Carney on YouTube.
Scotts Book – Harmonic Trading Volume One
Phew! That’s all you need to know about Harmonic patterns.
How can you add a Harmonic trading strategy to you own trading?
Other resources to check out:
Toby Crabel’s Opening Range Breakout
A selection of trading strategies
Linda Raschke’s trading strategy
Oh and don’t forget your trading psychology… a strategy is only as effective as the person executing the trades!