What Are Harmonic Patterns

Harmonic patterns are chart patterns that occur in financial markets and are based on the idea that prices move in predictable patterns. These patterns are based on the idea of harmonic ratios, which are ratios that are found in nature and are believed to be present in financial markets as well. Harmonic patterns are used by traders to identify potential reversals in the market and can be used in conjunction with other technical analysis tools to make trading decisions. There are several different types of harmonic patterns, including the Gartley pattern, the Butterfly pattern, and the Crab pattern, among others. These patterns are identified by looking for specific price and time relationships on a chart and can be used on any time frame or market.

cTrader Harmonic Pattern Indicator

Fondex cTrader is a very powerful platform. Besides the numerous built-in features it comes equipped with, it allows users to develop very powerful trading tools on top of it, extending the platform’s abilities. One of these sophisticated tools is the free cTrader Harmonic Scanning Indicator. The cTrader Harmonic Scanning Indicator allows you to detect two popular harmonic patterns, the Crab pattern and the Gartley pattern. 

Gartley Pattern

The Gartley pattern is the first documented harmonic pattern used for trading, which has been proposed by technical analyst H.M. Gartley. The Gartley pattern is in fact a XABCD pattern that respects the Fibonacci ratios between the pattern’s four legs An XABCD pattern is a five points chart pattern composed of two triangles, connecting important high and low points on the price chart. Below we will see two examples of the Gartley pattern.

First we will have a look at the bullish Gartley pattern drawn on the price chart below.

The rules for drawing a bullish Gartley pattern are as follows:

• AB must retrace 61.8% of the XA leg

• BC can rise between 38.2% – 88.6% of AB

• CD can be an extension of 1.272% – 1.618% of AB

• CD can also be a retracement of up to 78.6% of XA leg

• The point D is known as the PRZ or Potential Reversal Zone

The bearish Gartley pattern has the opposite rules and it is depicted in the chart below.

Here:

• AB must rise 61.8% of the XA leg

• BC can retrace between 38.2% – 88.6% of AB

• CD can be an extension of 1.272% – 1.618% of AB

• CD can also be a rise of up to 78.6% of XA leg

• The point D is known as the PRZ or Potential Reversal Zone

Trading the Gartley Pattern

The Gartley pattern can be interpreted as a trading signal as soon as point D is formed. Point D is known as the Potential Reversal Zone. This means that at that point in time there is an increased chance that the price movement will reverse. Now let’s see in more detail the charts we posted above.

In the screenshot below we can see a bullish Gartley pattern. The bullish Gartley pattern has been detected on the EURUSD h3 chart. The free tool detects a set of highs and lows that satisfy the ratios set by the Gartley pattern and draws the pattern on the chart.

The interesting observation on this chart is the price movement after the formation of the D point, which is our signal in this case. We can see that the price reverses almost immediately and moves towards a bullish direction, exactly like the Gartley pattern predicted.

Crab Pattern

The Crab pattern is similar to the Gartley pattern except that it has point D extending beyond point X. 

We can see a bullish Crab pattern scanned by the cTrader Harmonic Scanning Indicator below

Crab Pattern Characteristics:

• AB leg can retrace anywhere between 38.2% and up to 61.8%

• BC leg can retrace 38.2% – 88.6% of the AB leg

• CD leg is an extension of up to 161.8% of the XA leg and is also an extension of 224% – 316% of the AB leg

• Once the crab pattern is formed, traders can take their positions at or from point D targeting 61.8% and 127.2% of the CD leg.

• The crab pattern when formed can be very volatile.

• It is good to use oscillators to confirm the momentum especially when the price is trading the PRZ swing point D.

How To Trade The Crab Pattern

Once the Crab pattern has formed and follows the characteristics outlined above, a position can be taken after the CD leg has formed, sometimes you will not find the CD leg to reverse near the 161.8% extension, but if price action begins to stall and a reversal begins to happen, it can be a very high probability setup.

• It is best to wait until the pattern is formed at point D and then to take an appropriate short or long position.

• Stop losses should be placed at the low or the high of Pont D, and targets are usually at points A or B in the pattern.

• A good take profit would be at the 61.8% retracement also known as the golden ratio in Fibonacci Numbers.

Below we can see an example of a bullish Crab Pattern on EURUSD H1

Limitations of Harmonic Patterns

Harmonic patterns can generate a lot of false signals that could lead to substantial losses if used out of context. Therefore, when using strategies based on harmonic patterns, always consider the market fundamentals that currently move the market and combine the signals with other confirmation signals, like oscillators, support/resistance levels and the relevant price action taking place on the chart. 

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